| The Monetary Unit fundamental accounting assumption relies on a stable currency as the unit of record. Even during periods of low inflation, nominal financial statements violate this assumption. Although inflation effects are not recognized in nominal statements, such effects may have economic consequences. Moreover, because inflation affects firms differently depending on the structure of their assets and liabilities, these effects vary across firms and over time. I find that unrecognized gains and losses from inflation help predict future cash flows as these gains and losses manifest over time. I also find that investors do not fully incorporate this information in their pricing decisions. |
