Replacement cost accounting (current cost method) will usually
A) increase assets, decrease net income before taxes, and lower the return on equity.
B) increase assets, increase net income before taxes, and increase the return on equity.
C) decrease assets, increase net income before taxes, and increase the return on equity.
D) None of these apply.

Question

Quizplus · Accepted Answer

Replacement cost accounting involves valuing assets at their current cost to replace them. This will usually result in an increase in assets since the replacement cost may be higher than the book value of the asset. However, it will also result in a decrease in net income before taxes due to the higher cost of replacing the asset. This decrease in net income will also lower the return on equity since net income is a component of ROE. Therefore, choice A is the best answer.

Replacement Cost Accounting (Current Cost Method) Will Usually