During a Period of Rapidly Rising Inventory Prices and a Significant

question 85

Essay

During a period of rapidly rising inventory prices and a significant increase in inventory, a financial analyst made the following statement:
"I rank a company's earning power by using earnings per share. You do not need to be a rocket scientist and know all that accounting mumbo-jumbo in order to compare earnings per share of two companies to obtain a ranking of their earnings power."
Respond to the statement made by the financial analyst concerning the implications of choosing an inventory valuation method.

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Definitions:

Times Interest Earned Ratio

Operating income divided by interest expense.

Liquidity Ratios

Ratios that measure the speed with which a company can turn its assets into cash to meet short-term debt.