stereo warehouse is a us retailer that offers employees a defined benefit pension pl 1557364

Stereo Warehouse is a US retailer that offers employees a defined benefit pension plan and stock options as part of its compensation package. Stereo Warehouse prepares its financial statements in accordance with US GAAP. Peter Fried land, CFA, is an equity analyst concerned with earnings quality. He is particularly interested in whether the discretionary assumptions the company is making regarding

compensation plans are contributing to the recent earnings growth at Stereo Warehouse. He gathers information from the company’s regulatory fi lings regarding the pension plan assumptions in Exhibit 4 and the assumptions related to option valuation in Exhibit 5.

Compared to the reported 2009 financial statements, if Stereo Warehouse had used the 2007 expected volatility assumption to value its employee stock options, it would have most likely reported higher:

A. net income.

B. compensation expense.

C. deferred compensation liability.