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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23 July 2013
Anyone with an approach to help him answer the question is welcome to contribute.
23 July 2013
FIFO could improve profit margins if the latest stock purchased was at a lower price when compared to older stock. Choosing LIFO or FIFO is dependent on company policy, which should be agreed with their auditors. They they feel that stock is over valued (on a LIFO or FIFO) basis they may ask for this to be written off in the Profit & Loss account, so that stock is shown at a fair value.
24 July 2013
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