Profits are down so the controller decides to change the corporation's accounting policy relating to inventory costing.The change will allow the corporation to report higher income and higher assets,although the physical inventory has not changed.Which of the following statements is MOST correct?
A) The stock price is likely to increase because income is higher.
B) The stock price is likely to be unaffected because the stock market is efficient.
C) The stock price is likely to decrease because reported inventory is higher.
D) If the stock price increases, the stock market is efficient.

Question

Quizplus · Accepted Answer

Changing accounting policies to report higher income and assets without a real change in the company's operations or cash flows is generally seen through by investors, especially in efficient markets where all available information is already reflected in stock prices. Therefore, such accounting changes are unlikely to fool the market or affect the stock price significantly.

Profits Are Down So the Controller Decides to Change the Corporation's