AT&T; 4 \"Sh adl 65% 6:10 PM My Campus Karen\'s Dress Boutique is a retail store

Question

AT&T; 4 "Sh adl 65% 6:10 PM My Campus Karen's Dress Boutique is a retail store that sells vintage apparel and accessories. The store is in its third year of operations and is struggling financially. Part of the problem is that the cost of inventory has increased dramatically over the past two years. 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. 1. How is it that FIFO improves the profit of the Dress Boutique? 2. Did Karen make an good ethical choice by changing to FIFO? Why or why not? 3. What alternative(s) did Karen have in this situation? Please review the attached grading rubric prior to completing the assignment. Ethics Challenge Assignment Rubric ? ?

Explanation / Answer

1.FIFO stands for first-in, first-out. Under this method, items that go into inventory first are considered to be the items that are sold first for valuation purposes. LIFO stands for last-in, first-out. This valuation method assumes that the latest inventory items are the first sold.

if there is no inflation or decreasing price then inventory value on both alternative will be same and there will not be any effect on profits but practically in inflationery conditions

in inflationery condition

FIFO method will give high cost of inventory and lower cost of goods sold which leads to higher profit, however FIFO will refelect stock valuation near to market value

LIFO method in this case will give lower cost of inventory and higher cost of goods sold which leads to lower profit.

In Declining price conditions

both method will give vice versa results.

2. changes in accounting policy from LIFO to FIFO

as per GAAP ,Financial statements are required to disclose all significant changes in accounting policies. This is done to comply with accounting’s full-disclosure principle. As a result, the business’s financial statements would need to inform prospective investors that there was a shift from LIFO to FIFO as well as detail what the effect of that shift could be.

as per Revenue cost , cosistent method should be apllied for accounting policies, therefore before changing valuation method it will be essential to get permitted from revenue authorities.

3. Alternatives

Karen can change inventroy valuation method but with coplying with staturory permissions, disclosure as per GAAP and should use same method for future years.

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