The CEO of High Tech International decides to change an accounting method at the end of the current year.The change results in reported profits increasing by 5%,but the company's cash flows are not changed.If capital markets are efficient,then
A) the stock price will not be affected by the accounting change.
B) the stock price will increase due to higher profits.
C) the stock price will increase only if the accounting change will also result in higher profits in the next year.
D) the stock price will decrease because accounting method changes are not permitted under generally accepted accounting principles.

Question

Quizplus · Accepted Answer

If capital markets are efficient, investors will understand that the change in accounting method only affects reported profits and not actual cash flows. Therefore, the stock price should not be affected by the accounting change since it does not change the underlying value of the company or its future prospects.

The CEO of High Tech International Decides to Change an Accounting