The current economic environment is one of steady inflation. A firm uses historical cost accounting. Which of the following is/are true?
I. The firm's book value is overstated.
II. The firm's depreciation expense is understated.
III. The firm's tax expense is overstated.
IV. The firm's net income is understated.
Click on the arrows to vote for the correct answer
A. B. C. D.A
Since the assets are carried at historical values which are lower than the current asset values due to inflation, the depreciation expense is understated. Therefore, income is overstated, leading to an overstatement of taxes. Historical cost accounting in inflationary environment implies that the asset values are understated.