Management of the Davidson Company is currently considering the possibility of changing from the FIFO method to the LIFO method of inventory valuation for income tax and financial reporting purposes. The company's president, Dan Davidson, is concerned that using LIFO will tend to distort the company's balance sheet over time. He believes that the difference between the current cost of the company's inventory and the reported LIFO valuation will tend to grow larger each year, and that the company's reported LIFO inventory valuation will be progressively understated in relation to current cost. Davidson Company relies heavily on short-term bank credit, and Mr. Davidson feels that the company's bankers will tend to downgrade the company's short-term debt-paying ability if a switch to LIFO is made.
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The Answer of Management of the Davidson Company is currently considering the possibility of changing from the FIFO method to the LIFO method of inventory valuation for income tax and financial reporting purposes. The company's president, Dan Davidson, is concerned that using LIFO will tend to distort the company's balance sheet over time. He believes that the difference between the current cost of the company's inventory and the reported LIFO valuation will tend to grow larger each year, and that the company's reported LIFO inventory valuation will be progressively understated in relation to current cost. Davidson Company relies heavily on short-term bank credit, and Mr. Davidson feels that the company's bankers will tend to downgrade the company's short-term debt-paying ability if a switch to LIFO is made.
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Management of the Davidson Company Is Currently Considering the Possibility