Question

oluntary accounting policy changes are said to be “unintended signals” about the financial health and future prospects of a firm from management to a firm’s stockholders. Discuss how a and why you would expect the capital markets to react to news that a company was voluntarily changing its inventory method poicy from (a) LIFO to FIFO, and (b) from FIFO to LIFO.

Answer 1

For voluntary accounting policy changes that result in an increase in accounting earnings (i.e., a LIFO-to-FIFO switch), the share price of a firm tends to decline as the market anticipates that the method change is being undertaken to hide future poor operating performance.
This is just window dressing , imagine your trading profit & loss account if the amount of closing stock goes up because you just shifted frim LIFO to FIFO your gross profit goes up and your net profit increase.this is just an presentation change without any actual increase of assets in the company

For voluntary accounting policy changes that result in a decrease in accounting earnings (i.e., a FIFO-to-LIFO switch), the share price tends to rise as the market interprates that firm performance is exceeding market expectations and management is attempting to cash in the higher anticipated future performance by reserving cash for future projects.A fundamental analyst will see this as attractive thing and will be inclined with regards to other factors to invest in this share