Replacement Cost Accounting (Current Cost Method) During a Period of Inflation

question 62

Multiple Choice

Replacement cost accounting (current cost method) during a period of inflation will usually

• A) increase assets, decrease net income before taxes, and lower the return on equity.
• B) increase assets, increase net income before taxes, and increase the return on equity.
• C) decrease assets, increase net income before taxes, and increase the return on equity.
• D) None of the options apply.

---

Definitions:

Margin of Safety

The difference between actual sales and the break-even point, indicating the level of risk in not covering fixed costs.

Contribution Margin Ratio

A financial metric that measures the proportion of sales revenue that exceeds variable costs, indicating how much of the revenue is available to cover fixed costs and generate profit.

Operating Income

Earnings from a company's principal business activity, excluding expenses and revenues from non-operational sources.

Operating Income

A measure of a company's earning power from ongoing operations, equal to revenues minus operating expenses, but before taxes and interest.