1. Assume that inflation unexpectedly increases by 10 percent. Explain why a company's ROIC then needs to increase by more than 10 percent to preserve its shareholder value.
2. In conditions of high inflation, nonmonetary assets tend to be stated on the balance sheet at values far below their replacement costs. Inventory accounting can further complicate historical analysis for companies in such an environment.
Which accounting methodology would better represent the true value of the inventory in periods of high inflation: last in, first out (LIFO) or first in, first out (FIFO)? How would this change in a period of deflation?