Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 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

a. Swank Clothiers had sales of \(383,000 and cost of goods sold of \)260,000. What is the gross profit margin (ratio of gross profit to sales)?

b. If the average firm in the clothing industry had a gross profit of 25 percent,

how is the firm doing?

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.

Arrange the following items in proper balance sheet presentation:

Accumulated depreciation

\(309,000

Retained earnings

187,000

Cash

14,000

Bonds payable

136,000

Accounts receivable

54,000

Plant and equipment – original cost

775,000

Accounts payable

35,000

Allowance for bad debts

9,000

Common stock, \)1 par, 100,000 share outstanding

100,000

Inventory

70,000

Preferred stock, $59 par, 1,000 share outstanding

59,000

Marketable securities

24,000

Investments

20,000

Notes payable

34,000

Capital paid in excess of par (common stock)

88,000

Assume the following data for Cable Corporation and Multi-Media Inc.

Capable corporation

Muli-media inc

Net income

\(31,200

\)140,000

Sales

317,000

2,700,000

Total assets

402,000

965,000

Total debts

163,000

542,000

Stockholder’s equity

239,000

423,000

c. Discuss the factors from part b that added or detracted from one firm

having a higher return on stockholders’ equity than the other firm as

computed in part a.

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\( 698000
Interest Expense54800
Income before tax\) 643200
Taxes 30%192960
Income after tax$ 450240

b. Assume that in 20X2, sales increase by 10 percent and cost of goods sold increases by 20 percent. The firm is able to keep all other expenses the same. Assume a tax rate of 30 percent on income before taxes. What is income after taxes and the profit margin for 20X2?
See all solutions

Recommended explanations on Business Studies Textbooks

Change Management

Read Explanation

Corporate Finance

Read Explanation

Introduction to Business

Read Explanation

Nature of Business

Read Explanation

Business Case Studies

Read Explanation

Business Development

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