For this Discussion Board, you will be usingthe following situation:
Golf Challenge Corp., is a retail sports store carrying golfapparel and equipment. The store is at the end of its second yearof operation and is struggling. A major problem is that its cost ofinventory has continually increased in the past two years. In thefirst year of operations, the store assigned inventory costs usingLIFO. A loan agreement the store has with its bank, its primesource of financing, requires the store to maintain a certainprofit margin and current ratio. The store’s owner is currentlylooking over Golf Challenge’s preliminary financial statements forits second year. The numbers are not favorable. The only way thestore can meet the required financial ratios agreed on with thebank is to change from LIFO to FIFO. The store originally decidedon LIFO because of its tax advantages. The owner recalculatesending inventory using FIFO and submits those numbers andstatements to the loan officer at the bank for the required bankreview. The owner thankfully reflects on the available latitude inchoosing the inventory costing method.
For your Original Post*:
- How does Golf Challenge’s use of FIFO improve its net profitmargin and current ratio?
- Is the action by Golf Challenge’s owner ethical? Explain.