The analysis of financial statements is affected by inflation because
A)the value of long-term debt will increase
B)the value of fixed assets may be understated
C)the life of long-term assets are decreased
D)inventory increases

Question

Quizplus · Accepted Answer

Inflation can lead to the value of fixed assets being understated because depreciation is calculated based on historical cost, which does not take into account the impact of inflation on the value of those assets. As a result, the true value of fixed assets may be higher than what is reported on the financial statements. The other options are either incorrect or do not directly relate to the impact of inflation on financial statement analysis.

The Analysis of Financial Statements Is Affected by Inflation Because