Business Scenario - Inventory Valuation and Credit To begin, read the following
ID: 2591211 • Letter: B
Question
Business Scenario - Inventory Valuation and Credit
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
Assumed that initial purchase of materials costs less than later purchase of material cost.
Case -1:
Thus as per the above assumption, if both companies applies for loan and if the bank bases it's decision of giving loan is as per the net Income then Company B is more likely to obtain the loan.
Because Company B inventory costs of lower are sold first and the balance closing inventory costs will be high costs. If we make profit and loss statement the net income will be more as per this FIfo method.
Case -2: bank bases it's decision based on cash flow associated with the inventory costing valuation method.
As per the LIFO method ,the last purchased( higher )inventory costs are sold first than first purchased materials which material purchased initially sold later. So the cash flow will be more as per this Lifo method which is followed by Company A. So company A obtains loan
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.