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Accountant

Golf mart is a retails sports store carrying golf apparel and equipment. The store is at the end if its second year of operation and is struggling, a major problem is that its cost of inventory has continually increase in the past two years. In the first years of operation, 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 mart’s preliminary financial statements for its second year. The numbers are not favorable. The only way the store can meet the required financial ratio 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 recalculated ending inventory using FIFO and submits those numbers and statement to the loan officer at the bank review. The owner thankfully reflects on the available latitude in choosing the inventory costing method. Required 1. How does Golf Mart’s use of FIFO improve its net profit margin and current ratio? 2. Is the action by Golf Mart’s owner ethical? Explain.

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Answers

This is a big question. What is it that you do not understand and need help with?

hyperion

11 March 2013

Remember that LIFO means the most expensive valuation of stock goes out if stock prices are rising; which leaves the stock that is left as the lower value. This increases the cost of sales thus reducing the gross profit and, with it, the tax burden – so stock prices must be rising. So – this makes the value of the remaining stock lower and with it, the value of working capital. These facts forms the basis of your answer !!

tutor_royall

13 March 2013

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Golf Mart 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 Mart’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 How does Golf Mart’s use of FIFO improve its net profit margin and current ratio? Is the action by Golf Mart’s owner ethical? Explain.

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