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What effect will disinflation following a highly inflationary period have on the reported income of the firm? Why might disinflation prove favorable to financial assets? Comparisons of income can be very difficult for two companies, even though they sell the same products in equal volume. Why?

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What effect will disinflation following a highly inflationary period have on the reported income of the firm? Disinflation tends to lower reported earnings as inflation-induced income is squeezed out of the firm's income statement. This is particularly true for firms in highly cyclical industries where prices tend to rise and fall quickly. Why might disinflation prove favourable to financial assets? Softening in prices reduces the perceived need to hold real assets as a hedge against inflation. Investment shift then to financial assets Comparisons of income can be very difficult for two companies even though they sell the same products at equal volume. Why? There are many different ways of recognizing data for financial reports which can affect the profit and other ratios for example; -Timing of recording revenue (Enron) - Cost of goods sold (Inventory, LIFO and FIFO) => Extraordinary gains and losses (before or after taxes) > Depreciation methods and rates >> Reserve accounts >> Management payment methods (options or cash) >> Of balance sheet loans > Capitalizing certain expense then amortising over a longer time e.g. AOL. - Aggressive accounting methods may be a sign of avaricious managers alone or may be part of the competitive culture of a particular industry.