The Level of Real Income of a Firm Can Be

question 65

Multiple Choice

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
• E) There is no discernible pattern.

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Definitions:

Operating Income

Operating income is the amount of profit realized from a business's core operations, excluding taxes and interest expenses.

Negative Net Cash Flow

A situation where a company's outgoing cash exceeds the incoming cash during a specific period, indicating potential financial trouble.

Financial Statements

Structured reports that detail the financial performance of an organization, typically including the balance sheet, income statement, and cash flow statement.

Depreciation Expenses

The allocation of the cost of tangible assets over their useful lives, recognized as an expense on the income statement.