CAPITAL MAINTENANCE IN A PERIOD OF INFLATION
(A CASE STUDY IF NIGERIAN BOTTLING COMPANY COCA COLA OWERRI)
The capital maintenance reveal the goals, spur actions and provide check or control. Such that exceptional profit oriented goal performance can be achieved and on the reverse, adequate punishment to be exercised for bad performance. Capital maintenance is the replacement of on enterprise’s resources used up or consumed in the production of foods and services. An enterprise has maintained its capital if it has a much capital at the end of the period as it had at the beginning of the year. Any amount over and above that required to maintain the capital at the beginning of the period is profit.Note that the capital to be maintained is the original investment expressed in common monetary terms or in current replacement values.It is believed that capital maintenance help management is an enterprise to plan for future. If any justification is required for this project on the capital maintenance in a period of inflation. Firstly, the managers should penitents into every cranny of the enterprise and indoctrinated all management in their working habits. Secondary capital should be given the maximum attention while emphasis on the effects. Finally, it is now very clear from the research that inflation has a tremendous impact on the capital maintenance of manufacturing companies in particular and the economy in general.
TABLE OF CONTENTS
1.1.0 Statement of the problem
1.2.0 Objective and purpose of study
1.3.0 The research working hypothesis
1.4.0 The scope and limitations of the study
1.5.0 Definitions of terms
2.0.0 Literature review
2.1.0 Historical background
2.2.1 Capital Accumulation structure
2.3.1 Types causes and effect of inflation
2.3.2 Inflation and asset choice
2.3.3 Inflation, taxation and cooperate decisions
2.4.0 Capital maintenance
2.4.1 Capital maintenance and report determination
2.5.0 Accounting and inflation
1.0.0 Research design
3.1.0 Sources of data
3.2.0 Sample used
3.3.0 Method of data analysis
4.0.0 Analysis and interpretation of data
4.1.0 Presentation of data
4.2.0 Analysis of data (questionnaire)
4.3.0 Other data collected
4.3.1 Hypothesis 2
4.3.2 Hypothesis 3
4.4.0 interpretation of result
5.0.0 Summary, recommendation and conclusion
5.1.0 Summary of findings
Design of questionnaire
The word inflation is not new phenomenon; it has been experienced by most countries in the world at some stage in their history. Mere looking at this statement ones mind will really, run to developing countries. But it is in history that even the UNITED KINGDOM in 1974 when they could no longer sit back and watch inflation run them set up “The inflation Accounting committee” with Francis Sandilands as chairman to look into the problem. Even the Almighty UNITED STATES OF AMERICA went through it sometime in the sixties before they come to they present economic stability. So, one will not be surprised when countries like ours and some other like the Asian countries and even Latin American Countries are mentioned as suffering from this CANKER WORM called inflation.
There are so many definitions. Solow (1979) for instance, sees inflation as going on when one needs more and more money to buy some representative bundle of goods and services, or a sustained fall in the purchasing power of money. It is a sustained rising trend in the general price level or put in another way, it is a high and persistent rise in the price level.
Inflation is a rise in the general level (or average level of prices) of all goods and services. The general price level thus varies inversely with the purchasing power of a unit of money (such as the naira). For example, if prices double, purchasing power decreases by one-half. If prices halve, purchasing power doubles. Therefore, inflation is also a reduction in the purchasing power of a unit of money. The opposite of inflation is deflation.
TYPES OF INFLATION
(a) Demand – pull inflation: This types of inflation take place when aggregate demand is rising while the available supply of goods is becoming increasingly limited. It is induced by excessive demand not matched with increase in supply.
(b) Cots – push inflation: This occurs when prices increase because factor payments to one or more groups of resource owners rise faster than productivity or technical efficiency. Typical forms of cost – push inflation are “wage-push” “profit-push”, and “commodity”.
(c) Hyper – inflation: Hyper-inflation occurs when the price level rises at a very rapid rate.
CAUSES AND CONTROL OF INFLATION IN NIGERIA CAUSES:
There are several causes of inflation in Nigeria.
1. Excessive money supply caused by ineffective monetary and fiscal policy.
2. Fall in the supply of goods and services, especially agricultural product causing demand to rise and price to rise as well.
3. Budget deficit or government expenditure programmers is a major cause of inflation in developing nations. Too much expenditure by government can cause inflation.
4. Too much importation of goods and services can cause inflation especially in developing nations.
5. An increase in population can put more pressure on the little goods and services thereby prices will rise.
6. The activities of the middleman in the distribution of goods and services can also cause severe inflation in our economy.
7. Excessive demand by consumers and higher production cost can also cause inflation.
8. Monopolistic practices with respect to production, importation and distribution of certain essential commodities can cause inflation.
9. Increase in wages and salaries and competitive attempts by various economic and social groups to increase their share of the national cake, can also cause inflation.
1. The setting of price control board by the government of fix maximum prices changed for certain commodities is one way of controlling inflation but experience shows that this system does not work.
2. Monetary policy is another way to control inflation. It involves the use of traditional monetary instruments to reduce the quantity of money in increase in the bank or discount rate, increase in the liquidity ratio, us of open market operation (OMO) special directives etc.
3. Fiscal policy: This entails an increase in personal income tax reduction in government expenditure.
4. Total ban on the importation of certain items may help to control inflation especially when such inflation is imported.
5. The production of more goods and services in an economy may also help to control inflation.
6. The control of wages increases or wage freeze will also help to control inflation.
7. There is need to overhaul the entire distribution networks to control inflation in an economy.
INFLATION IN NIGERIA
One of the major causes of inflation in Nigeria has been the various government policies to stimate a fast rate of economic growth and development since independence. In recent years, however, specific policies like SAP: external debt policies, policies on subsidies on petroleum product and fertilizer, policies of privatization and commercialization, policies on trade liberalization, and interest rate deregulation, and others are responsible for the inflationary trend in our economy.
Before the SAP, inflation in Nigerian was caused primarily by using world export price and price and falling output. These are major external factor Contributing to Nigeria inflation. Thereafter, domestic or internal causes like increasing government expenditure, rising domestic credit creation and supply bottlenecks such as shortage of raw materials and spare parts worsened the situation. There is need, therefore, for monetary policy reform, exchange rate reform, effective price and wage policy and fiscal policy reform, to solve the problem of inflation in Nigeria.
But for the purpose of this research, inflation according to Samuelso (1976) is a time of generally rising prices for goods and factors of production, rising prices for bread, cars, haircuts, rising wages, rents etc. Inflation has assumed a great deal of political social and economic significance that goes along with it. The political and social effect a part, the economic impact cannot be over emphasized. One of the most disturbing aspects of this to companies and their managers is its affect on capital maintenance. By companies we mean those publicly owned – those whose capital must have been sources through the money market.
CAPITAL!!! This one name that has failed to agree with the word INFLATION right from the world go. While the managers are busy managing and trying their best to maintain the capital entrusted in them, the inflation on its part is busy disobeying and eroding the value of the capital being handled and sub squally increased by manager. What an opposition?
One school of thought has argued in fervor of inflation based on its benefits. But they were proved wrong based on the long run effect of such advantages. This could be illustrated thus:
Supposing a company with a capital base of N4 million incurs expenditure of say N200,000 to make a profit of N50,000 after tax. Again, supposing in the next two years more due to inflation their profit rose to N million surely, workers salaries will have to be increased or they would seek for the increase by force since every other factors of productions reward has increased. Like wise intense or dividends. The government will not be left out in their share of the “national cake” by the time the company tries to meet all these demands of all these interest groups.
They may be left with nothing to their credit. Meanwhile the asset, i.e. machines plants, buildings etc. have in one way or the other won out. And the company might not be able to replace them or even repair them despite the huge profit recorded. This is the handwork of inflation. At this juncture, if he manager involved does not take time, he might be in deep shit. And this is where the problem lies. No wonder Nikitin (1980) states that “most people regard inflation as being associated with undesirable effect and it has implications for all persons and institution who conduct their economic activities by means of monetary unit”.
The question of maintaining capital in a period of inflation in manufacturing companies has become relevant, mostly in the recent past. Capital may simply be defined as “money which is invested” from a lay mans point of view. But in the real sense, it encompassed the working capital, real assets like building machines plants, and even vehicles used in the business. It is still embarrassing that even the accountancy profession have not postulated up till now. Hence the researcher has to investigate capital maintenance in a period of Inflation with “NIGERIA BOTTLING COMPANY PLC OWERRI” makers of COCA-COLA and other soft drinks. The researcher is interested in finding out how this multinational company which is highly equipped and mechanized has been able to remain at the top through out all this inflation any period from the 1970s, and at the same time maintaining its capital (Nigerian situation being as critical as it is with the value of Naira deprecating everyday, now at the rate of about N100.00 to $1.00 as against some 85-7 pence to $1.00 it used to be in the 60s)
For convenience, this research is organize into five major chapters: chapter one deals with general over vied of the study, chapter two centers on literature review it the work of previous authors on the subject matter of inflation and capital maintenance, chapter three treats the research procedures adopter four is devoted to sources of data and analysis as well as the hypothesis testing.
Finally, chapter five deals with summary of the work, conclusion and recommendation.
1.1.0 STATEMENT OF THE PROBLEM
Capital being the life wire of an organization has been defined by many authors from the perspective of their discipline, but a business profit making organization (manufacturing concern in this case), it includes their working the liquid cash, manufacturing. And official buildings, machines, reserves, loan capital and even share capital equity. Growth of this chapter should be the ultimate aim of both the managers and the owners of the business, and even the creditors and investors. But this aim is not easy to come by even in a small scale industry to talk of a multination manufacturing company like “Nigeria bottling company” especially during inflation.
Sequel to the above statement, the outline problems of this research are:-
1. Companies have difficulties in pooling the adequate volume of capital from different sources.
2. During inflation, the companies also have difficulties in maintenance of real asset (machines, equipment’s buildings etc) in terms of problem of choosing an adequate depreciation method.
3. Companies encounter some difficulties in measurement of profit and maintenance of profit and maintenance of reserve to the tune of inflation.
4. The government taxation policies during inflation also have some adverse effect on the manufacturing companies.
1.2.0 OBJECTIVE AND PURPOSE OF STUDY
It is very pertinent and clear that no companies director’s and managers will pilot the affairs of their companies for a whole accounting period only to pay their debts and dividends from their capital. It is very unheard if at least the owners (share holders) will not find it funny. This fact therefore necessitates the importance and relevance of the subject matter.
The objective of this study therefore is to:
1. Find out how manufacturing companies gather their required volume of capital from different sources during inflation (i.e. internal and external sources) and the impact of this inflation on the different cost of the different sources of capital.
2. For the company to keep going, assets have to be replaced or maintained whether inflation or not. This research will find out how these assets are being maintained during inflation, the concepts and depreciation method adopted during the period.
3. The researcher is also determined to find out the impact of government taxation policies and tax rates on the profit and capital maintenance of the companies during inflation.
4. It is also the interest of the researcher to find out how those manufacturing companies, the techniques and method they adopt in the maintenance of their reserves and measurement of their profit so as to beat the situation of inflation. This include their assets revaluation policies and dividends policies.
The above stated objectors will enable the researcher to unravel some of the underlying mysteries surrounding the subject matter, to give an understanding of the situation and finally to prefer a constructive solution and recommendations which mighty be a lasting solution to the problem of “capital maintenance during a period of inflation” that was why he choose a multi-national company like coca-cola which in its capacity would be able to help the researcher in this study.
1.3.0 THE RESEARCH WORKING HYPOTHESIS
To guide the research to have a clear insight into the topic “Capital maintenance during inflation”, and enable him make a dependable discovery and draw a helping conclusion and hence render, his recommendations accordingly, the following working hypothesis have been formulated.
Null hypothesis (HI)
Inflation has affected the maintenance of capital in manufacturing companies. Manufacturing companies reserves and profits cannot be measured adequately during inflation.
ALTERNATIVE HYPOTHESIS (H0)
Manufacturing companies reserves and profits can be measured adequately during inflation.
NULL HYPOTHESIS (H0)
Taxation (minimum taxable income) affects inflation rate significantly.
Affect inflation rate significantly.
1.4.0 DEFINITION OF TERMS
(i) Bond: A note, which represents a prosing to pay its holder a fried amount at various times in future.
(ii) Capital: Most commonly refers to net worth, in some situations the term refers to owners equity.
(iii) Capital maintenance: this means the replacement of the enterprises resources used up or consumed in the production of goods and services.
(iv) Debenture: it is a long-term investment that is usually secured by mortgage on a specific properly
(v) Debt: This is payment which must be paired to somebody institution or country it created an obligation.
(vi) Dividend: It can be defined as any part of profit distributable to shareholders in form of cash or otherwise.
(vii) Equity find: the contribution made by the owner and refrained profit in a company.
(viii) ED: Exposure draft.
(ix) Government: A body that governs the affairs of the people in a definite territory.
(x) Inflation: this can be defined as a persistent increase in price of goods and services without a corresponding increase in production.
(xi) Investors: they are individuals, companies with the role aim of receiving in turn higher benefits.
(xii) Investment: This can be defined as the commitment of séance resources with the sole aim of receiving in turn higher benefits.
(xiii) Monetary items: This means cash, accounts notes, interest etc. payment or receivable in a specific number of naira or other current unit.
(xiv) Profit: This is simple the growth of capital value over times.
(xv) Poor inflation hedges: Any assets whose returns are fixed in money terms e.g. bonds and money.
(xvi) Policy: This can be defined as a plan of action, statement of aims and ideas especially policies made by a government political party and business company.
(xvii) Retained Earnings: This is part f a firms profit and other deductibles that is not made available for distribution to shareholders and owner of the firm.
(xviii) Watering Dawn: This signify the capitalization pf find to a larger degree than the earning capacity and consequently the distributable profit justify.
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