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

Requirements

1. Company A uses the LIFO inventory method and discloses its use of the LIFO method in 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. Conservatism is an accepted accounting concept. Would you want management to be conservative in accounting for inventory if you were a shareholder or a creditor of a company? Give your reason.