GM506 diss 2

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School

Purdue University *

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Course

GM506

Subject

Economics

Date

Nov 24, 2024

Type

docx

Pages

Uploaded by DrDinosaurPerson592

The textbook has not aged well. The statement “inflation appears to be nowhere on the horizon in 2021” made me stop and ponder just how valuable the analysis information provided by Block et al. (2022, p. 68). In the next line they state others think there could be inflation. I find it interesting that the book was updated in 2022 and they did not remove that statement. The text provides two predictions of opposite results showing that no one can know the future with certainty. Return on investment is a ratio of net income divided by total assets (Block et al., 2022). Inflation can result in higher product sales pricing, but the cost of goods may be prior to inflation pricing, increasing net income. Assets may be valued at prior to inflation costs. Inflation can increase the numerator and does not change the denominator. This can cause the return-on-investment ratio to appear higher than it should. Fixed asset turnover is the ratio of sales divided by fixed assets (Block et al., 2022). This ratio can look higher than it actually is during inflationary periods. The sales price can be increased from inflation, however the fixed asset value may be valued at price levels prior to inflation. The discussion of assets in terms of a balance sheet is a tricky concept for me. Working in operations I am responsible for maintaining physical assets. From an operations standpoint equipment and facilities decrease in value as they are used, but replacement costs increase (even more with inflation). When discussing assets should physical plant and equipment have a steady valuation, or should they be listed in replacement cost? In my current operation we use railcar movers that are 45 years old and worth about $15,000, if you could find someone into antiques or looking for parts. A new replacement machine is approximately $400,000. The business cannot function without this machine so how should it really be valued? Inventory turnover is the ratio of sales divided by inventory (Block et al., 2022). This ratio can look better than it actually is during inflationary periods. The sales price can be increased from inflation, however the inventory cost may be valued at price levels prior to inflation. The debt to asset ratio is the total debt divided by total assets (Block et al., 2022). Inflation could increase debt because as inflation increases the cost of goods and services the accounts payable will increase, or a business may need to borrow money to keep functioning. If assets are valued prior to inflation the debt to asset ration may appear higher than it actually is.

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