Inflation is defined as a continuous rise in the prices of goods and services, which is met by the decline in the value of the currency and the decline in the purchasing power of consumers, and thus the decline in demand. So business owners are very concerned about the impact of inflation on their businesses, and there is no doubt that there are significant or indirect impacts that affect the business sector, Among the most prominent of these are the high costs of production and low demand, which lead to a decline in business revenues. To learn more about the impact of inflation on the financial statements of companies, we will explain the most prominent of these effects during this article.
The most important effects of inflation on the financial statements
Below are the most prominent effects that result from inflation and appear in the financial statements:
Debts
Business owners usually get financing loans at changing interest rates, and as a result of high inflation rates, central banks raise the interest rate to face inflation, and therefore the profits that borrowers pay on loans rise, which means high debt. Some companies may resort to converting these loans to loans with fixed interest or to scheduling loans to reduce the high profits.
Foreign Currency
Many companies and businesses deal with foreign currencies, and during periods of high inflation rates, the exchange rate of foreign currencies is affected, so companies that accept foreign currencies in their treatment must take into account the disbursement of these currencies at the appropriate time and at the correct exchange rate.
Inventory
The inventory is typically evaluated using a variety of methods, including the interior first coming out first and the interior finally coming out first, or the average cost of the commodity, and each method has an effect on the final value of the stock, depending on the company’s profitability and ability to reduce its tax obligations.
Goodwill
Fame is one of the unfinished assets of the company, and it is the one that one company prefers to accept consumers on; during the inflation period, the decline in demand for goods and services may affect the fame of a specific product, and thus some companies resort to increasing the rates of discounts on their goods in order to motivate consumers to buy them and maintain their popularity, which affects the company’s profits in exchange for high production costs.
Investments
Inflation leads to fluctuations in the business market, which may increase or reduce the value of investments and the values of companies, and this in turn directly affects the delayed taxes on the company’s assets. Thus, companies resort to changing their investment strategies, adopting new methods in the accounting process, and showing disclosure, especially in the margins of the financial statements.
OverHead Expectes
Many companies resort to entering long contracts either related to obtaining services or renting buildings, and these contracts are usually adjustable based on inflation rates, as wages and service rates rise with high inflation rates and thus the general expenses of companies increase with them.
In terms of DiscLosers
At each end, companies must evaluate whether they are able to continue their business for the subsequent period or not, and if the company is unable to pay its obligations for a period of 12 months after the last issuance of its financial statements, this is evidence of its inability to continue to work, and often this is the result of a steady rise in inflation rates that the company was not ready for.
Read also: What are the most popular indicators of inflation?
