Profitability ratios are distorted by inflation because profits are stated in current dollars, while assets and equity are stated in historical dollars.

Question

Quizplus · Accepted Answer

This is because inflation causes the value of assets and equity to be understated in current dollars, leading to an overstatement of profitability ratios such as return on assets and return on equity.

Profitability Ratios Are Distorted by Inflation Because Profits Are Stated