Sound Electronics is a retail electronics store carrying home theater equipment. The store is at the...

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Accounting

Sound Electronics is a retail electronics store carrying hometheater equipment. The store is at the end of its fifth year ofoperations and is struggling. A major problem is that its cost ofinventory has continually increased for the past three years. Inthe first year of operations, the store decided to assign inventorycosts using LIFO.
A loan agreement the store has with its bank, requires the storeto maintain a certain profit margin and current ratio. The store’sowner is currently looking over Sound Electronics’ financialstatements for its fifth year. The numbers are not favorable. Theonly way the store can meet the required financial ratios agreed onwith the bank is to change from LIFO to FIFO. The store originallydecided on LIFO because of its tax advantages. The owner asks theaccountant to recalculate ending inventory using FIFO and submitthose numbers and statements to the loan officer at the bank forthe required bank review.
How would the use of FIFO improve Sound Electronics'profit margin and current ratio? Is the request by SoundElectronics' owner ethical? How should the accountant proceed?Explain. Justify your answer by referencing accounting principlesand/or concepts.

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A FIFO method of inventory valuation considers the latest purchase of lots in its closing inventory The initial purchase of inventory lots is issued to cost of goods sold based on first come first served basis When the prices of inventory are raising the closing stock is valued at latest purchase lot which has highest price Hence the See Answer

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Transcribed Image Text

Sound Electronics is a retail electronics store carrying hometheater equipment. The store is at the end of its fifth year ofoperations and is struggling. A major problem is that its cost ofinventory has continually increased for the past three years. Inthe first year of operations, the store decided to assign inventorycosts using LIFO.A loan agreement the store has with its bank, requires the storeto maintain a certain profit margin and current ratio. The store’sowner is currently looking over Sound Electronics’ financialstatements for its fifth year. The numbers are not favorable. Theonly way the store can meet the required financial ratios agreed onwith the bank is to change from LIFO to FIFO. The store originallydecided on LIFO because of its tax advantages. The owner asks theaccountant to recalculate ending inventory using FIFO and submitthose numbers and statements to the loan officer at the bank forthe required bank review.How would the use of FIFO improve Sound Electronics'profit margin and current ratio? Is the request by SoundElectronics' owner ethical? How should the accountant proceed?Explain. Justify your answer by referencing accounting principlesand/or concepts.