Negotiating The Loan Agreement With The Lender Essay

1378 Words Jan 30th, 2016 null Page
If I was Kathy Hutton, I would agree to re-negotiate the loan agreement with the lender. For Summit Distributors, inventory enact a large portion of assets, being an important part of the balance sheet. Therefore it is crucial for Kathy to pick the accounting policy that will result as the payoff for the company in the long run not just for the upcoming year. The accounting methods that a company decides to use for the costs of inventory can directly impact the balance sheet, income statement and statement of cash flow.

Lastly, during rising costs the LIFO method decreases the value of ending inventory compared to the FIFO method. Reducing inventory results in higher cost of goods sold which leads to lower taxable income and the tax liability paid by business. This allows company to use the tax savings for reinvesting in their business. In summary, the LIFO inventory method increases a company’s cash flow, just as other accounting expenses by reducing income and tax liability. Even though the company formerly switched to LIFO in 1988, returning to FIFO for now will be outlooked by shareholders and the market’s way to cover up financial weakness. So, despite switching to FIFO could delay defaulting on the loan agreement, it can cause the shareholders/investors to walk away and extremely reduce the company’s value. Therefore, Kathy should re-negotiate the loan agreement with the lender.

2. If you were Dave Flanders, would you recommend staying with the LIFO…

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