Briefly discuss how a firm's P/E ratio is related to the firm's choice of accounting methods.

Firms that use conservative accounting methods (i.e.,those that tend to recognize expenses sooner rather than later or recognize revenues later rather than sooner)will report lower earnings than would otherwise be the case.The lower earnings means that these firms will tend to have higher P/E ratios than might otherwise be the case.Conversely,firms that use aggressive accounting methods (i.e.,those that tend to recognize expenses later rather than sooner and revenues sooner rather than later)tend to report higher earnings than would otherwise be the case.The higher earnings means that these firms will tend to have lower P/E ratios than might otherwise be the case.An interesting issue is the extent to which investors in the market adjust for such accounting method differences when setting the market prices of otherwise similar firms.