Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

Financial Accounting

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

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Multiple Choice

A lender need not be penalized by inflation if the:

interest rate charged includes an adjustment for expected inflation

loan is repaid in fixed nominal terms

loan is classified as a prepaid expense

borrower uses the loan for purchasing inventory

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Verified step by step guidance

Understand the context: Inflation reduces the purchasing power of money over time. For a lender, this means that the money repaid in the future may be worth less than the money lent today unless adjustments are made.

Identify the key concept: To avoid being penalized by inflation, the lender must ensure that the interest rate charged on the loan accounts for the expected inflation rate. This is known as the 'inflation-adjusted interest rate' or 'real interest rate.'

Break down the options: Analyze each option provided in the problem to determine which one aligns with the concept of protecting the lender from inflation.

Focus on the correct option: The correct answer is that the interest rate charged includes an adjustment for expected inflation. This ensures that the lender receives a return that compensates for both the time value of money and the loss of purchasing power due to inflation.

Conclude: The other options (loan repaid in fixed nominal terms, loan classified as a prepaid expense, or borrower using the loan for purchasing inventory) do not directly address the issue of protecting the lender from inflation. Only an interest rate adjustment for expected inflation achieves this goal.