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Q.3BTN_2

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Financial & Managerial Accounting
Found in: Page 273
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Question: BTN 5-3 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 required 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 at the bank for the required bank review. The owner thankfully reflects on the available latitude in choosing the inventory costing method.

Required:

Is the action by Golf Challenge’s owner ethical? Explain.

Answer

Changing the Inventory valuation method from LIFO to FIFO is Unethical.

See the step by step solution

Step by Step Solution

Step 1: Definition of Current Ratio

A financial ratio using the current assets and current liabilities to determine the liquidity position of the business entity is known as the current ratio.

Step 2: Action is Ethical or Unethical

The action of Golf challenge to change the inventory valuation method is unethical because it is not done to reflect the financial information more accurately. Instead, it is done to fulfil the requirements of obtaining a loan.

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