CAPITAL MAINTENANCE IN A PERIOD OF INFLATION

(A CASE STUDY OF NIGERIAN BOTTLING COMPANY – COCA COLA 9^TH MILE CORNER ENUGU).

ABSTRACT

Political stability in Nigeria has led to a marked improvement in the general operating environment in the country.  Hence capital maintenance is looked into in the period of inflation as the only way out.

The word inflation is not a new phenomenon; it has been experienced by most countries in the world at some stages in their history.  Mere looking at this statement, ones mind will really run to developing countries; but it is history that the UNITED KINGDOM in 1974 when they could no longer sit back and watch inflation ruin them set up the Inflation Accounting Committee with Fianers Sandilands as chairman, to look into the problem.

Since Nigeria’s inflationary trend is monetary, prices have been rising because many people including the government have been spending it.  This is to say that uncontrolled inflation can dislocate the economy and can cause social upheaval.  As such, this may create havoc if left uncontrolled.

CHAPTER ONE

• Introduction 1

1.1     Statement of the problem                                              10

• Objective and Purpose of Study 11
• The Research work hypothesis 13
• The scope and limitations of the study 14
• Definitions of terms 16

 

CHAPTER TWO

• Literature Review 18

2.1     Historical Background                                         18

• Capital 21
  • Capital accumulation structure 23
• Inflation 25
  • Types, causes and effect of inflation 26
  • Inflation and asset choice 30
  • Inflation, taxation and corporate decisions 32
• Capital maintenance and profit determination 46
• Accounting and Inflation 52

 

CHAPTER THREE

• Research Design 70

3.1     Sources of data                                                    70

• Method of data analysis 72
• Area of study 75

 

CHAPTER FOUR

• Analysis and Interpretation of data 76

4.1     Data presentation                                                 76

 

CHAPTER FIVE

• Summary, Recommendation and Conclusion 91

5.1     Summary of findings                                            91

• Conclusion 93
• Recommendation 94

BIBLIOGRAPHY                                                          97

QUESTIONNAIRE                                              99

CHAPTER ONE

 

INTRODUCTION

The word inflation is not a new phenomenon; it has been experienced by most countries in the world at some stages in their history.  Mere looking at this statement, ones mind will really run to developing countries; but it is history that the UNITED KINGDOM in 1974 when they could no longer sit back and watch inflation ruin them set up the Inflation Accounting Committee with Fianers Sandilands as chairman, to look into the problem.  Even the almighty UNITED STATES OF AMERICA went through it sometime in sixties before they come to present economic stability.  So, one will not be surprise 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 on inflation.  Solow (1979), for instance, sees inflation as going on when one need 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 of all goods and services.  The general price level thus varies inversely with the purchasing power of a unit of money.  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

• Demand – Pull Inflation: This type of inflation takes place when aggregate demand is rising while the available supply of good is becoming increasingly limited. It is induced by excessive demand not matched with increases in supply.
• Cost-Push Inflation: this occurs when prices increases because factor payment 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.
• 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.

• Excessive money supply caused by ineffective monetary and fiscal policy.
• Fall in the supply of goods and services especially agricultural product causing demand to rise and price to rise as well.
• Budget deficit or government expenditure programmers is a major cause of inflation in developing nation. Too much expenditure by government can cause inflation.
• Too much importation of goods and services can cause inflation especially in developing nation.
• An increase in population can put more pressure on the little goods and services thereby price will rise.
• The activities of the middleman in the distribution of goods and services can also cause severe inflation in our economy.
• Excessive demand by consumers and higher production cost also can cause inflation.
• Monopolistic practices with respect to production, importation and distribution of certain essential commodities can cause inflation.
• 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.

Control

• 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.
• Monetary policy is another way of traditional monetary instruments to reduce the quantity of money in circulation. The techniques applied include:
  • Increase in the bank or discount rate;
  • Increase in he liquidity ratio;
  • Use of open market operation OMO) and all special directives
  • Fiscal policy: This entails an increase in personal income tax reduction in government expenditure.
  • Total ban on the importation of certain items may help to control inflation especially when such inflation is imported.
  • The production of more goods and services in an economy may also help.
  • The control of wages increase or wage freeze will help to control inflation.
  • 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 stimulate a fast rate of economic growth and development since independence.  In recent years, however, specific policy like:

SAP: external debt policies, policies on subsidies on petroleum product and fertilizer, policies of privatization and commercialization, policies on trade liberalization and responsible for the inflationary trend in our economy.

Before the SAP, inflation in Nigeria, was cursed primarily by using world export price and falling output.  These are major external factor contributing to Nigeria inflation.  Thereafter, domestic or internal causes like increasing government expenditures, rising domestic credit creation and supply bottlenecks such as shortage of raw materials and spares 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 head, cars, haircuts, rising wages, rent, etc.  Inflation has assumed a great deal of political, social and economic significance that goes along with it.  The political and social effect apart, the economic impact cannot be over emphasized.  One of the most disturbing aspects of this to companies and their managers is its effect on capital maintenance.  By companies we mean those publicly owned those whose capital must have been sourced through the money market.  CAPITAL!! This is 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 managers.

One school of thought has argued in favour of inflation base 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 N4million incurs expedition of say N200,000 to make a profit of N50,000 after tax.  Again, supposing in the next ten years more due to inflation their profit rose to N1million surely, workers salaries will have to be increased or they would seek for the increase by force since every other factor of production reward has increased.  Like wise intense or dividends.  The government will not be left out in the 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, building, 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 the manager involved does not take time, he might be in deep shit.  And this is where the problem lies.

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 man’s 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 accounting 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 ENUGU makers of COCA COLA and other soft drinks.  The researcher is interested in finding out how his multinational company6 which is highly equipped and mechanized has been able to remain at the top through out all this inflation any period from the 1970’s and at the same time maintaining its capital (Nigerian situation being as critical as it is with the value of Naira depreciating every day, now at the rate of about N138.00 to $1.00 as against some 85 –7 pence to $1.00 as it used to be in the 60s.

For convenience, this research is organized into five major chapters: chapter one deals with general overview of the study;  chapter two centers on literature review it is the work of previous authors on the subject matter of inflation and capital maintenance.  Chapter tree treats the research procedures; chapter four is devoted to source of data and analysis as well as the hypothesis testing.

Finally, chapter five deals with summary of the work, conclusion and recommendation.

 

 

 

• 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 as 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:

• Companies have difficulties in pooling the adequate volume of capital from different sources.
• During inflation, the companies also have difficulties in maintenance of real asset in terms of problem of choosing an adequate depreciation method.
• Companies encounter some difficulties in measurement of profit and maintenance of profit and maintenance of reserve to the tune of inflation.
• The government taxation policies during inflation also have some adverse effect on the manufacturing companies.

 

• OBJECTIVES AND PURPOSE OF THE STUDY

It is very pertinent and clear that not company director and manager will pilot the affairs of their companies for a whole accounting period only to pay their debt and dividends from their capital.  It is very unheard of at least the owners (shareholders) will not fine it funny.  This fact therefore necessitates the importance and relevance of the subject matter.

The objectives of this study is to:

• Find out how manufacturing companies gather their required volume of capital from different sources during inflation (ie internal and external sources) and the impact of this inflation on the different cost of the different sources of capital.
• 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.
• 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.
• It is also the interest of the researcher to find out these manufacturing companies, the techniques and methods 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 dividend policies.

The above stated objectives 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 proffer a constructive solution and recommendation which might be a lasting solution to the problem of “capital maintenance during a period of inflation” that was why he chose a multi-national company like coca-cola, which in its capacity would be able to help the researcher in his study.

 

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 recommendation accordingly.  The following working hypotheses have been formulated.

Hypothesis 1

          Null hypothesis (h1)

Inflation has affected the maintenance of capital in manufacturing comprises 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.

Hypothesis 3

Null Hypothesis (H0)

Taxation (minimum taxable income) affects inflation rate significantly.

 

• THE SCOPE AND LIMITATION OF THE STUDY

The scope of this research work centers on Nigeria Bottling Company Enugu, of all the manufacturing companies in the country.  It covers the major sectors of the company’s operations such as, production maintenance, and accounting.  The research also covers information from place like the National Library and State Library and I.M.T. Library all in Enugu.

The researcher encountered some problems, amongst these problems are:

• Some find it very difficult to part with some information which they consider confidential. This was the case until the researcher produced a letter form the school duly signed by the head of department before they could grant research work.
• Another constraint which the researcher encountered was gathering materials for the literature review. This was not easy as he has to travel from time to time to the centre of study and the libraries and schools mentioned above.
• The uncooperative attitude of the company in the earlier stage as regards to the questionnaires did not help matters. And also to get some date like their published accounts of different dates, to enable the required compassion was not an easy task.  But all in all,  this work will be success which is the most important thing.

 

 

 

• DEFINITION OF TERMS
• Bond: a note, which represents a prosing to pay its holder a fixed amount at various times in future

(ii) Capital: Most commonly refers to net worth in some situations the term refers to owner’s equity.

(iii) Capital Maintenance: This means the replace of the enterprise’s 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 paid to somebody, institution or country.  it creates an obligation.

(vi) Dividend: It can be defined as any part of profit distributable to share holders in form of cash or otherwise.

(vii) Equity Fund: The contribution made by the owner and refrained profit in a company.

(vii) 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 rise in price of goods and series without a corresponding increase in production.

(xi) Investors: They are individuals, companies and cooperation who commit the resources with the sole aim of receiving in return higher benefit.

(xii) Monetary Items: This means cash accounts, note interests, etc. payable or receivable in a specific number of Naira or other current units.

(xii) Profit: This is simply the growth of capital value over time.

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