A CEO decides to change an accounting method at the end of the current year. The

Question

A CEO 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 changing. If capital markets are efficient, then the stock price will:

a. not be afftected by the accounting change

b. increase durto higher profits

c. increase only if the accounting change will also result in higher profits in the next year.

d. decrease because accounting method changes are not permitted under generally accepted accounting principles.

Explanation / Answer

(c)  The stock price will increase only if the accounting change will also result in higher profits in the next year

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