Management of the Singer 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, Diane Singer, is concerned that using LIFO will tend to distort the company’s balance sheet over time. She 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. Singer Company relies heavily on short-term bank credit, and Ms. Singer 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.
Discuss the major factors that, over time, will affect the magnitude of the difference between the current cost of the company’s inventory and the reported LIFO amount.
Evaluate the merit of Ms. Singer’s concern that bankers may be misled by the company’s balance sheet if LIFO is used.