Sound Electronics is a retail electronics store carrying home theater equipment. The store is at the end of its fifth year of operations and is struggling. A major problem is that its cost of inventory has continually increased for the past three years. In the first year of operations, the store decided to assign inventory costs using LIFO.
A loan agreement the store has with its bank, requires the store to maintain a certain profit margin and current ratio. The store’s owner is currently looking over Sound Electronics’ financial statements for its fifth 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 asks the accountant to recalculate ending inventory using FIFO and submit those numbers and statements to the loan officer at the bank for the required bank review.
How would the use of FIFO change Sound Electronics’ profit margin and current ratio?
Is the request by Sound Electronics’ owner ethical? What accounting principles inform this situation? How shouaqwld the accountant proceed? Explain.
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