Golf Challenge Corporation Case Study

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Golf Challenge Corporation 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 …show more content…

It is easy to see how it affects the corporation, a misguidance on their balance sheet will eventually catch up to them. If prices of their goods began to fall, they cannot keep changing their inventory system. The company will eventually have to show the higher priced goods as sold. Beyond the corporation it will affect the bank that gives the company the loan. The bank is being misled to believe that the company is grossing a higher net profit, thus the bank is expecting to be repaid the debt, even though the company may not be able to afford it. The stock holders of the corporation would be greatly affected if these numbers were to be published. From an investor standpoint, the company would look like a rapidly growing entity. They would have a decent gross profit, ultimately misleading any investors. The workers at Golf Challenge Corporation are affected. Their jobs and livelihoods are at stake. In the financial statements released while using FIFO the company looks like they can pay their employees, but this may not be the case. Furthermore, the owner is directly affected. It is the owner’s company that is in stake, but beyond that it is the owner who directly sent the financial statements to the bank. The ethical issue in this case lies on his …show more content…

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

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