Comparative Analysis of Reported and Inflated Financial Ratio

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. This study investigates the impact of inflation on companies’ financial performance and financial position by evaluating and comparing reported and inflated financial ratios. Financial statements of 42 manufacturing companies covering 7 industrial sectors have been restated in current purchasing power for a period of 5 years (2004-05 to 2008-09). The ratios were calculated on both historical and adjusted financial statements to form two sets of ratios. The Current Purchasing Power method and Financial Ratio analysis have been employed to study the impact of inflation on different financial ratios. This study offered valuable information and results showed that with the impact of inflation there is significant difference in liquidity, profitability and activity ratios except quick ratio.