You are making a detailed analysis of the financial statements and accounting records of two companies: Adams Company and Bar Company. They are in the same industry, and price levels have been rising steadily for several years. In the course of your investigation, you observe that the inventory value shown on the Adams company balance sheet is quite close to the current replacement cost of the merchandise on hand. However, for Bar Company, the carrying value of the inventory is far below current replacement cost.
- Discuss what method of inventory valuation is probably used by each company.
- If we assume that the two companies are identical, except for the inventory valuation method used, Discuss which company has probably been reporting higher net income in recent years and how would you know.