The inventory costing method a company chooses can affect its financial statements and the decisions of the people who use those statements.

Requirements

1. Company A uses the LIFO inventory method and discloses its use in the notes to the financial statements. Company B uses the FIFO method to account for its inventory. Company B does not disclose which inventory method it uses. Company B reports a higher net income than Company A. In which company would you prefer to invest? Give your reason.

2. Representational faithfulness is an accepted accounting concept. If you were a shareholder or a creditor of a company, would you want it to faithfully represent its accounting for inventory? Give your reason.