CK Hitman Limited has changed how it accounts for inventory from FIFO to weighted average. Although the resulting earnings report released is 23 percent higher than before the change in accounting policy, no effect on tax payable. There is no other surprise in the earnings report, and the change in the policy was publicly announced. Assume that the market is efficient. Required: Evaluate how the movement of stock price when the market learns that the reported earnings are higher. What if the change in policy can make the firm pay less tax in future.
CK Hitman Limited has changed how it accounts for inventory from FIFO to weighted average. Although the resulting earnings report released is 23 percent higher than before the change in accounting policy, no effect on tax payable. There is no other surprise in the earnings report, and the change in the policy was publicly announced. Assume that the market is efficient. Required: Evaluate how the movement of stock price when the market learns that the reported earnings are higher. What if the change in policy can make the firm pay less tax in future.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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CK Hitman Limited has changed how it accounts for inventory from FIFO to weighted average. Although the resulting earnings report released is 23 percent higher than before the change in accounting policy, no effect on tax payable. There is no other surprise in the earnings report, and the change in the policy was publicly announced. Assume that the market is efficient.
Required:
- Evaluate how the movement of stock price when the market learns that the reported earnings are higher.
- What if the change in policy can make the firm pay less tax in future.
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