To begin, read the following scenario: Company 1 and Company 2 are online retail

Question

To begin, read the following scenario: Company 1 and Company 2 are online retailers. Both companies are basically identical and follow the same accounting practices except that Company A uses LIFO and Company B uses FIFO to value their inventory. Because of rising inventory costs, both companies need additional capital to manage their operations. For your main discussion post, reflect on these questions: If Company A and Company B apply for a loan at their local bank and the bank bases its decision on net income, which company is more likely to obtain the loan? Explain. What if the bank based its decision on cash flows associated with the inventory costing valuation method the company uses? Which company might be better positioned to obtain the loan? Elaborate your responses and provide an example as needed to support your assessment.

Explanation / Answer

As the inventory cost is rising. Company B who uses FIFO method for inventory system will have more chances of obtaining loan from bank. As the Inventory in hand at the end will be recent inventory with higher price. The income side of Income statement will show more profit than Company A using LIFO method. As Net income of Company B is higher, then Company B has more chances to obtain loan from the local bank.

If the decision is based on the cash flows associated with the inventory costing valuation method, then company A ith LIFO method will have higher cash flos than company B with FIFO method of inventory valuation because cash flow will be lo because of high cash taxes. In this case, Company A has better chance of obtaining the loan than Company B.

opening Inventory= 10, closing inventory= 15(equivalent to 10 if purchased at the beginning but now costing 15 because of increased prices), production during the period= 90. sale during the period= 100

Using FIFO, net income will be 15, cash flows = 100

Using LIFO, net income will be 10, cash flows = 105

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