Golf Challenge Corp. is a retail sports store carrying golf apparel and equipment. The store is at the end of its second year of operation and is struggling. A major problem is that its cost of inventory has continually increased in the past two years. In the first year of operations, the store assigned inventory costs using LIFO. A loan agreement the store has with its bank, its prime source of financing, requires the store to maintain a certain profit margin and current ratio. The store’s owner is currently looking over Golf Challenge’s preliminary financial statements for its second year. The numbers are not favorable. The only way the store can meet the financial ratios agreed on with the bank is to change from LIFO to FIFO. The store originally decided on LIFO because of its tax advantages. The owner recalculates ending inventory using FIFO and submits those numbers and statements to the loan officer for the required bank review. The owner thankfully reflects on the available latitude in choosing the inventory costing method. Required 1. How does Golf Challenge’s use of FIFO improve its net profit margin and current ratio? 2. Is the action by Golf Challenge’s owner ethical? Explain.

Question

Golf Challenge Corp. is a retail sports store carrying golf apparel and equipment. The store is at
the end of its second year of operation and is struggling. A major problem is that its cost of inventory has
continually increased in the past two years. In the first year of operations, the store assigned inventory
costs using LIFO. A loan agreement the store has with its bank, its prime source of financing, requires the
store to maintain a certain profit margin and current ratio. The store’s owner is currently looking over Golf
Challenge’s preliminary financial statements for its second year. The numbers are not favorable. The only
way the store can meet the financial ratios agreed on with the bank is to change from LIFO to FIFO. The
store originally decided on LIFO because of its tax advantages. The owner recalculates ending inventory
using FIFO and submits those numbers and statements to the loan officer for the required bank review.
The owner thankfully reflects on the available latitude in choosing the inventory costing method.
Required
1. How does Golf Challenge’s use of FIFO improve its net profit margin and current ratio?
2. Is the action by Golf Challenge’s owner ethical? Explain.

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