Karen's retail store sells apparel. The store is in the third year of operations and is struggling financially. Part of the problem is that the cost of inventory has increased. The store assigns inventory costs using LIFO. A loan agreement with the bank requires the store to maintain a certain profit margin. Karen is reviewing the current year financial statements and sees that results are not favorable. The only way that the store can meet the required profit margin is to change inventory costing from LIFO to FIFO. Karen redoes the financial statements using FIFO and submits them to the bank without disclosing the change. How is it that FIFO improves the profit of the store? Did Karen make a good ethical choice by changing to FIFO? Why or why not? What alternatives did Karen have in this situation?
Karen's retail store sells apparel. The store is in the third year of operations and is struggling financially. Part of the problem is that the cost of inventory has increased. The store assigns inventory costs using LIFO. A loan agreement with the bank requires the store to maintain a certain profit margin. Karen is reviewing the current year financial statements and sees that results are not favorable. The only way that the store can meet the required profit margin is to change inventory costing from LIFO to FIFO. Karen redoes the financial statements using FIFO and submits them to the bank without disclosing the change. How is it that FIFO improves the profit of the store? Did Karen make a good ethical choice by changing to FIFO? Why or why not? What alternatives did Karen have in this situation?
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