In the second year of business at Golf Challenge Corporation the company is struggling. The cost of their inventory is rising, and they are in grave danger of losing their bank loan (their prime source of financing) due to not meeting the required financial ratios agreed and set forth by the bank at the time the loan was given. The owner comes up with a solution, and figures that instead of using Last in-First out (LIFO) the company can use First in-First Out inventory cost system (FIFO) and meet their required financial ratios set forth by the bank. Ultimately, Golf Challenge Corporation should not submit documents to the bank using FIFO as opposed to their previous system LIFO in order to meet the bank requirements as it is ethically wrong.
To begin it is important to understand the differences between the two methods of assigning costs to inventory. Last in-First out (LIFO) is the system that the corporation had originally been using. Under the LIFO system the company assumes that the goods most recently bought are sold first. Under this system the cost of goods sold is most accurately stated. On the other hand there is FIFO, in this system the goods bought first are sold first. The cost of the most recent goods are left in the ending inventory. In the Golf Challenge Company it is greatly beneficial for the company to use the FIFO system as it shows a lower amount for cost of goods sold than the company’s current system LIFO. (Wild 218)
The true ethical issue of the matter lies in the very fact that the actual cost of goods sold will be greatly understated. A company that has been in business for over a year cannot simply switch how they record their inventory. Switching these inventory recognit...
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...eds to talk to the bank. This is an agreement that needs to be worked out between the owner and the loan officer. Simply manipulating the books is not going to help the company in the long run. Beyond this it is truly dishonest. The owner may need to look at the option of layoffs, an increase in prices, or a change of suppliers to compensate for the constantly rising costs. The owner needs to speak with the loan officer and show him that he has a reasonable plan to better his financial statements. Even if this plan involves laying off workers it is ethically more correct than not being able to pay the workers. Raising price should be considered also as the cost is rising, the price the consumer pays need to be raised. The bank may oversee not meeting the required financial ratios if they understand that the ratios are only bad because of the given inventory system.
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