Using the nominal interest expense as a deduction tends to
A) understate earnings.
B) reflect the purchasing power of earnings.
C) understate the true interest expense.
D) overstate earnings.

Question

Quizplus · Accepted Answer

Using the nominal interest expense as a deduction understates earnings because it does not account for the effect of inflation on the interest expense. Inflation erodes the purchasing power of money, meaning that the actual expense may be higher than the nominal expense reported.

Using the Nominal Interest Expense as a Deduction Tends to