In periods of inflation, accounting depreciation is __________ relative to replacement cost, and real economic income is________.
A) overstated; overstated
B) overstated; understated
C) understated; overstated
D) understated; understated
E) correctly stated; correctly stated

Question

Quizplus · Accepted Answer

In periods of inflation, accounting depreciation, which is based on historical cost, is understated because it does not reflect the higher current replacement cost of assets. Real economic income is overstated because it does not account for the decrease in purchasing power.

In Periods of Inflation, Accounting Depreciation Is __________ Relative to Replacement