Furthermore, since the CPI is a direct indicator of the strength of the economy, it is a pro-active measurement rather than a reactive one.
By compensating via the CPI rather than dollar exchange, what International Cosmetics receives is the ability to factor actual inflation data into their balance sheet. Since dollar exchange is already proven to be an inefficient measure, it is necessary in this case to find an alternative methodology. Using the CPI as the basis for balance sheet conversion and interpretation would entirely solve the inflation problem. The reason for this is because inflation directly impacts the buying power of consumers before anything else, and the CPI is the most accurate indicator of inflation....
Therefore the CPI is pro-actively reflecting changes within inflation months ahead of devaluation. Using CPI as a standard would then mitigate the problems with currency exchange and provide all of the benefits of having a stable and meaningful standard for judging the financial situation of International Cosmetics in Iceland. This however is only one method by which we can change and improve the financial statements involved, simpler methods such as changing the dollar conversion would also help the process. In the final analysis the key is in realizing the weakness of using inconsistent standards for currency exchange and confounding variables that impact devaluation which makes it an inefficient indicator for inflation.
