Final answer:
A too brief depreciation period can overstate a company's earnings, misleadingly presenting it as more successful than it might actually be. In terms of inflation, creditors lose out, while borrowers benefit by repaying loans with less valuable currency.
Step-by-step explanation:
Too short a depreciation period overstates earnings, and makes the business look like an overachiever. Setting a depreciation period that is too brief results in higher profits on paper in the short term because the expenses assigned to depreciation are lower. However, this doesn't provide an accurate financial picture of the company's health. In relation to inflation, this scenario means that the value of money is decreasing. Those who are creditors will find their assets worth less because of inflation, as the purchasing power of the money they receive back diminishes. Conversely, demanders of financial capital end up better off, given that they can repay their loans using money that has less purchasing power than when they originally borrowed, effectively reducing the real cost of their loans.