Golf Challenge corp

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