Advantages and disadvantages of current purchasing power?

Answer 1

Advantages of Current Purchasing Power (CPP) MethodCPP method is useful for finding out real financial position of organization. Following are the advantages of CPP method.

1. CPP method adopts the same unit of measurement by taking into account the price changes.
2. Under CPP method, historical accounts continue to be maintained. CPP statements are prepared on supplementary basis.
3. CPP method facilitates the calculation of gain or loss in purchasing power due to the holding of monetary items.
4. CPP method uses common purchasing power as measuring unit. So, the comparative study is easy.
5. CPP method provides reliable financial information for taking management decision to formulate plans and policies.
6. CPP method ensures keeping intact the purchasing power of capital contributed by shareholders. So, this method is of great importance from the point of view of the shareholders.

Disadvantages of Current Purchasing Power (CPP) Method

Following are the some major points for the disadvantages of CPP method:

1. CPP method considers only the changes in general purchasing power. It does not consider the changes in the value of individual items.
2. CPP method is based on statistical index number which cannot be used in an individual firm.
3. It is very difficult to choose a suitable price index.
4. CPP method fails to remove all the defects of historical cost accounting system.
5. The use of general price index for CPP method is questioned. While general price index deals with consumer goods, business is interested in the price movement of producer goods.