If Karp had used FIFO instead of LIFO, its debt to equity ratio computed as of 31 December 2009 would have:

A. increased.

B. decreased.

C. remained unchanged.

John Martinson, CFA, is an equity analyst with a large pension fund. His supervisor, Linda Packard, asks him to write a report on Karp Inc. Karp prepares its financial statements in accordance with U.S. GAAP. Packard is particularly interested in the effects of the company’s use of the LIFO method to account for its inventory. For this purpose, Martinson collects the financial data presented in Exhibits F and G.

Martinson finds the following information in the notes to the financial statements:
• The LIFO reserves as of 31 December 2009 and 2008 are $155 million and $117 million,
respectively; and
• The effective income tax rate applicable to Karp for 2009 and earlier periods is 20%.

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EXHIBIT F Balance Sheet Information (US$ millions) As of 31 December 2009 Cash and cash equivalents Accounts receivable Inventories Other current assets Total current assets Property and equipment, net Total assets Total current liabilities Long-term debt Total liabilities Common stock and paid in capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 172 626 620 125 1,543 3,035 4,578 1,495 644 Selling, general, and administrative expense Interest expense Income tax expense Net income 2,139 1,652 787 2,439 4,578 EXHIBIT G Income Statement Information (US$ millions) For Years Ended 31 December Sales Cost of goods sold Depreciation and amortization expense 2009 4,346 2,211 139 1,656 31 62 247 2008 157 458 539 65 1,219 2,972 4,191 1,395 604 1,999 1,652 540 2,192 4,191 2008 4,161 2,147 119 1,637 18 48 192