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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.

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