Question

Which of the following statements is most correct?

a. Cash flows and accounting profit are not at all related since no common elements are used in the calculation of either individual measure.

b. The debt ratio measures that portion of fixed assets which is supported by common equity.

c. High inflation can seriously distort firms' balance sheets, and since inflation also affects depreciation and inventory costs, profits can also be affected.

d. Financial statement analysis is important from the investor's viewpoint in assessing past performance and predicting future performance. However, from a management perspective, financial statement analysis measures history and is merely a reporting requirement. It is not useful for planning future actions because it does not help determine future cash flows.

e. When an action is taken at one point in time, but its full effects cannot be accurately measured until later, this has the potential to affect the firm's financial statements. However, as long as the firm keeps the same standard accounting period this timing problem can be avoided.

Answer 1

Option C is correct

Higher inflation costs affects the inventory costs and depreciation which would impact the profits of a company.