Inflation Accounting Effects on Financial Statement Interpretation Accuracy

Abstract

This research investigates the impact of inflation accounting methodologies on the
accuracy of financial statement interpretation by non-expert users, a critical yet underexplored area at the intersection of accounting, information systems, and cognitive
science. Traditional research has focused on compliance and valuation effects for professional analysts, neglecting how methodological choices in presenting inflation-adjusted
data influence the decision-making accuracy of managers, investors, and regulators
without specialized accounting training. We propose a novel, cross-disciplinary experimental methodology that integrates principles from information visualization, cognitive load theory, and behavioral finance. Participants were presented with identical
underlying financial data from a simulated manufacturing firm over a ten-year period
of high inflation, but formatted using four different inflation accounting presentation
frameworks: Current Purchasing Power (CPP), Current Cost Accounting (CCA) with
physical capital maintenance, a hybrid CPP-CCA narrative format, and a control group
using historical cost accounting only. Accuracy of interpretation was measured through
a series of tasks assessing profitability judgment, liquidity assessment, and long-term
viability prediction, with response time and confidence levels recorded. Results demonstrate a significant and non-linear relationship between accounting methodology and
interpretation accuracy. Contrary to expectations that more complex adjustments
(CCA) would reduce accuracy, we found the structured, asset-focused CCA presentation led to a 22% higher accuracy in long-term viability judgments compared to
historical cost, though it reduced accuracy in short-term liquidity assessments by 15%.
The hybrid narrative format, while increasing time-to-decision by 40%, produced the
most balanced accuracy across all task types. A key novel finding is the identification
of a ’cognitive reconciliation gap’: users presented with CPP data, which adjusts all
items by a general price index, demonstrated high confidence but the lowest actual
accuracy, particularly in overestimating real profitability. This gap between confidence
and competence presents a significant risk for decision-making. The study concludes
that the design of inflation accounting information systems is not a neutral reporting exercise but a fundamental determinant of decision quality. We contribute a new
framework for ’cognitive-aware accounting presentation’ that prioritizes the interpretative outcomes for end-users, arguing that accounting standards must consider not
just the computational correctness of inflation methods, but their cognitive effects on
the accuracy of financial statement interpretation.