What is the impact of this on financial statements as a whole?

The impact of price movements on financial statements can be listed as follows:

1. Reported profit figures do not reflect the operating results of the business accurately. Reported profits are far in excess of actual profits generated, leading to the distribution of unrealized profits and excessive taxation. Although this situation is unfavourable for businesses, it does not affect the continuation of the activities of the businesses since the inventory profits are included in the profit for the period, and the share of depreciation is not enough to renew the assets.
2. Balance sheets do not reflect the economic value of the business. Fixed assets and inventories are recorded at historical cost, which is lower than the cost of replacing the assets.
3. Since estimates for the future period are based on the financial statements prepared on a historical cost basis, the differences between the estimated value and the actual values can cause the company’s performance to be interpreted negatively.
4. The effect of changes in the general price levels on monetary assets and liabilities can not be determined.
5. It becomes difficult to predict the amount of capital that will be needed in the future, which leads the business to resort to borrowing, embedding greater risk in the business.
6. Failure to identify actual economic performance leads to sub-optimal resource allocations and faulty tax policies, which in turn will lead to fiscal, social and political problems.[1]

[1] The Effect of Inflation on Financial Statements and Application of Inflation Adjustment to Enterprises, Research Assistant Çağrı Köroğlu, Research Assistant Tuğba Uçma, Mevzuat Magazine, June 2005, Year 8, Issue 90.