The level of real income of a firm can be distorted by the reporting of depreciation and interest expense.During periods of high inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.
A)understate; overstate
B)understate; understate
C)overstate; understate
D)overstate; overstate

Question

Quizplus · Accepted Answer

During periods of high inflation, the cost of assets may rise, leading to an overstatement of depreciation expenses. On the other hand, the interest expense may not fully reflect the increase in the cost of borrowing, resulting in an understatement of income. Therefore, the level of reported depreciation tends to overstate income, and the level of interest expense reported tends to understate income, making option C the correct choice.

The Level of Real Income of a Firm Can Be