|Previous||1 of 1||Next|
114 HASKINS & SELLS December The Misleading Dollar THE dollar is in trouble. Its integrity as a medium for the expression of financial value is assailed. Changing economic conditions are responsible. Due to the general rise in the price level of commodities the dollar is no longer trustworthy as an index to conditions. With the increase in prices the purchas-ing power of the dollar has declined. It represents to-day only from a third to a half the quantity of a commodity which it did five or six years ago. Hence, it is unsafe for comparative purposes. Formerly, an increase in the inventory figure on a comparative balance sheet meant an increase in the quantity inventory. From the latter inventory, taking into consideration the average stock and average volume of sales, a conclusion might have been reached as to whether or not the management responsible for a given enterprise was maintaining a rational position with regard to the amount of capital invested in the stock of merchandise. To-day, unless the increase in the price level is taken into consideration, any attempt to use the figures representing values as a basis for comparison is filled with danger. A striking example of the dollar fallacy for comparative purposes is brought out by Mr. O. P. Austin, statistician of The National City Bank of New York, in an interesting article on Foreign Trade which appeared in the October, 1920, issue of The Americas, a publication of The National City Bank of New York. A list of the principal exports of the United States expressed in terms of dollars and comparing the 1920 period with a similar period for the year 1914 shows the following: 1920 $5,473,563,755 1914 1,667,448,585 Increase $3,806,115,170 Percentage of increase 228.2 The same list is compared on a quantity basis with a somewhat different result: 1920 Pounds 148,693,415,297 1914 110,408,739,580 Increase 38,284,675,717 Percentage of increase 34.6 In attempting to interpret the significance of an increased inventory it is necessary therefore to take into consideration the quantities involved. Dollars for comparative purposes, where quantities enter into the situation, are misleading and dangerous. The application of the quantity test is not always practicable in accountancy engagements because of conditions, or of the time required. It is sometimes possible, on the contrary, to test the major items in an inventory using the prices in force previous to the upward trend of the price level. For example, taking the quantity exports of the United States for the year 1920 and comparing them, at 1914 prices, with the value of exports in 1914, produces the following results: 1920—148,693,415,297 lbs. at 1914 prices. . . $2,245,567,958 1914 1,667,448,585 Increase $578,119,373 Percentage of increase 34.6 It is axiomatic that unlike things may not be compared. To compare dollars at two dates when there has been a change in the value of the dollar during the period intervening between the dates is to compare unlike things. The result cannot be otherwise than misleading.
Haskins & Sells Bulletin, Vol. 03, no. 12 (1920 December 15), p. 114
|Source||Originally published by: Haskins & Sells|
|Collection||Deloitte Digital Collection|
|Digital Publisher||University of Mississippi Libraries. Accounting Collection|
|Identifier||HS Bulletin 3-p114|