The inflationary effects typically have greater impact, the larger the differences in the age of the assets of the firms being compared. Without adjustment, inflation tends to cause older firms (older assets) to appear more efficient and profitable than newer firms (newer assets).

Question

Quizplus · Accepted Answer

This is because inflation makes the value of assets decrease over time, and older assets may have a lower depreciated value compared to newer assets. Therefore, older firms may appear to have higher profits compared to newer firms even if they are similarly performing.

The Inflationary Effects Typically Have Greater Impact, the Larger the Differences