How does inflation distort ratio analysis comparisons for one company over time (trend analysis) and for different companies that are being compared?

How does inflation distort ratio analysis comparisons for one company over time (trend analysis) and for different companies that are being compared? Are only balance sheet items or both balance sheet and income statement items affected?

Expert Solution

How does inflation distort ratio analysis comparisons for one company over time (trend analysis) and for different companies that are being compared?

During Inflationery period the value of money decreases as it takes more cash to buy the same amount of product. The analyses should be done in real time. During the real time, this will adjusts for inflation. If ratios are calculated for incorrect data , the ratios will give false results. Ratios are calculated on the basis of that past. This will provide partial information of the future forecasting.

Are only balance sheet items or both balance sheet and income statement items affected?

Inflation can affect anything that has to do with money. So, the answer is no, inflation can effect income statement, balance sheet, cash flow statement.

jeff jeffy answered 2 years ago

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How does inflation distort ratio analysis comparisons for one company over time (trend analysis) and for different companies that are being compared?

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