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 initial discussion post, reflect on these questions:

1. 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.
2. 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.

For your responses, focus on the following questions: Do you agree with your classmates responses as far as which company might obtain the loan if the bank bases its decision on net income and/or cash flows? Why or why not? How has the discussion impacted your understanding of the effects of FIFO and LIFO inventory methods on net income and cash flows? Support your responses to classmates with additional research and/or examples of your understanding of these inventory valuation methods.

Be sure to post at least one reference in support of your explanations and conclusions.