Firms using standard accounting procedures base depreciation allowance on historical cost of equipment rather than replacement cost. Inflation then causes which of the following?
A)depreciation allowances to be too small to replace capital goods that are wearing out
B)lower taxes, which partially compensates the firms
C)easier decision-making
D)firms replacing machinery more easily from their surplus funds

Question

Quizplus · Accepted Answer

Inflation causes the historical cost of equipment to become lower than replacement cost, which makes depreciation allowances based on historical cost insufficient to replace capital goods that are wearing out.

Firms Using Standard Accounting Procedures Base Depreciation Allowance on Historical