Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 2: 2-6DQ (page 46)

Comment on why inflation may restrict the usefulness of the balance sheet as normally presented.

Short Answer

Expert verified

Inflation in an economy affects the balance sheet values of the company,as inflation results in an increase in the fair value of the fixed assets. However, the values in the balance sheet are shown on a historical basis.

Step by step solution

01

Inflation 

Inflation is defined as the progressive increase in the price of the products and services in the economyand a decrease in the purchasing power of the given currency over the period.

02

Balance sheet 

A balance sheet is a major component of the financial statements of the company.It is prepared to show the position of the company’s assets, liabilities and the company’s fund at the end of the reporting period. When there exists inflation, the balance may not represent the true values of its items. As a result, its usefulness gets restricted.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Dr. Zhivàgo Diagnostics Corp.’s income statement for 20X1 is as follows:

Sales\( 2790000
Cost of goods sold1790000
Gross Profits\)1000000
Selling and administrative expenses302000
Operating profits\(698000
Interest Expense54800
Income before taxes\)643200
Taxes30%192960
Income after-tax$ 450240

Compute the profit margin for 20X1.

Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions. (LO3-5)

c. Fixed asset turnover

Sosa Diet Supplements had earnings after taxes of $800,000 in 20X1 with 200,000 shares of stock outstanding. On January 1, 20X2, the firm issued 50,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 30 percent.

a. Compute earnings per share for the year 20X1.

b. Compute earnings per share for the year 20X2.

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

The total assets for this company equal \(80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.

e. Return on assets (investment).

Times mirror and glass company

Sales

\)126,000

Less: Cost of goods sold

93,000

Gross profit

\(33,000

Less: selling and administrative expenses

11,000

Lease Expenses

4,000

Operating profit*

\)18,000

Less: Interest expenses

3,000

Earning before taxes

\(15,000

Less: Taxes (30%)

4,500

Earning after taxes

\)10,500

*equal income before interest and taxes

Baker Oats had an asset turnover of 1.6 times per year.

b. The following year, on the same level of assets, Baker’s assets turnoverdeclined to 1.4 times and its profit margin was 8 percent. How did the returnon total assets change from that of the previous year?
See all solutions

Recommended explanations on Business Studies Textbooks

Managerial Economics

Read Explanation

Organizational Communication

Read Explanation

Nature of Business

Read Explanation

Financial Performance

Read Explanation

Business Case Studies

Read Explanation

Managers

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free