Advance Payments During Inflationary Periods

Abstract

During periods of rismg prices, contracts for future delivery of merchandise are usually linked to a price index to protect suppliers from future cost increases, and customers, therefore, advance payments to avoid the price linkage. Suppliers are then faced with two problems: (i) the investment of advance payments and (ii) the presentation of the investment outcome in the fimancial reports. This paper uses a portfolio selection process to analyse the suppliers' investment decisions, and shows that the accounting presentation depends on the particular investment decision, which in turn affects the principalagent relationship. Suggestions are made to eliminate the undesirable effects of this relationap on management's decision making.