For a firm with old, heavy fixed assets, replacement cost accounting will normally decrease the return-on-equity ratio.

Question

Quizplus · Accepted Answer

Replacement cost accounting typically increases the value of assets on the balance sheet, which can lead to a higher asset base. This can result in a lower return-on-equity ratio since the denominator (equity) increases if profits do not increase proportionately. However, the question posits a decrease in return-on-equity, which would not be the normal outcome; instead, the effect would be an increase in the asset base, potentially lowering the return on those assets if income does not increase at the same rate.

For a Firm with Old, Heavy Fixed Assets, Replacement Cost