The effect of inflation on nonmonetary assets is reflected in the

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I. The cost of nonmonetary assets generally increases with inflation because it takes more money to purchase the same amount of goods and services. This is known as the purchasing power effect of inflation. Therefore, nonmonetary assets, which include tangible assets such as real estate, commodities, and precious metals, will generally appreciate in value in inflationary conditions.

II. Inflation also affects the value of nonmonetary assets on a financial statement. The historical cost of acquiring nonmonetary assets is typically recorded in financial statements. However, when inflation occurs, the value of these assets may increase, leading to a potential understatement of their true market value. Additionally, the depreciation recorded on nonmonetary assets may be understated due to inflation, leading to a potential overstatement of net income. To account for this, companies may adjust the financial statements with inflation indexes or revaluation of assets.

The Effect of Inflation on Nonmonetary Assets Is Reflected in the