ExpertHard1 markMultiple Choice
CPA · Question 20 · Area I: Business Analysis
In a period of high inflation, which of the following companies is likely to experience the MOST negative impact on its financial performance?
In a period of high inflation, which of the following companies is likely to experience the MOST negative impact on its financial performance?
Answer options:
A.
A company with long-term fixed-price sales contracts and variable input costs.
B.
A company with significant long-term fixed-rate debt.
C.
A company with high pricing power and short-term supplier contracts.
D.
A company with large holdings of real estate assets.
How to approach this question
Analyze the mismatch between revenue (fixed) and costs (rising).
Full Answer
A.A company with long-term fixed-price sales contracts and variable input costs.✓ Correct
A
Inflation increases input costs. If a company cannot raise prices due to fixed contracts, its profit margins will compress significantly.
Common mistakes
Thinking debt is bad in inflation (it's actually good if fixed-rate).
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