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The owner of Gold Challenge improved its net profit margin and current ratio by switching from LIFO, which assigns the highest amount of cost of
The owner of Gold Challenge improved its net profit margin and current ratio by switching from LIFO, which assigns the highest amount of cost of goods sold and has the lowest gross profit and net income, to FIFO, which assigns the lowest amount to cost of goods sold and has the highest gross profit and net income. The owner had originally chosen LIFO due to the tax break it allowed him, but at the end of the second year, using LIFO had actually hurt his numbers. Since he was using the LIFO system, his numbers were on the lower side due to the cost of inventory rising. The owner most likely realized this problem as he was going over the figures that he needed to give to the bank. He realized that the bank may not be willing to renew their agreement if it looked as if they would have trouble making their payments. On this realization, he decided to quickly switch to FIFO, knowing that his numbers would increase and look much better. The thing that is most notable about this transition, is that it states nothing about whether or not he complied with the consistency concept and disclosed all the necessary information that he needed to. Nigel Payne (2002) stated that “The recent KPMG, Public Service Commission and Transparency SA Ethics in Practice survey[,] shows a high level of business conduct in existence but a poor level of organizational attention to actively managing ethics” (p. 2).This action is not ethical at all, especially Biblical. By switching inventory systems at the last minute only to make sure that his numbers looked good for the bank, the owner is not only cheating, but he is lying. He used LIFO all year. It was only when he was getting his numbers ready and noticed that they were going to reflect poorly that he chose to change inventory methods. It is most likely that he has already taken part in the tax break that he would receive with LIFO. Another problem is that he most likely has not informed the bank of the change, if he has, there is a good chance that he did not specify when the change was made and just how much it affected his numbers. The implications of this situation could be that since this owner has been deceitful with the bank, they may terminate business with him, and he may possibly lose his business. There is also the possibility that word will get out and other companies or banks will not want to do business with him. The Bible tells us to be honest in all things. We are to be a shining example of God. Being deceitful, especially in business transactions, reflects poorly on not only the owner, but the business as well. If and when the bank finds out of this certain and quick change, the owner may witness worse things than not meeting the financial ratios that he and the bank had agreed on. Zechariah 8:16-17 tells us, “ ‘These are the things you are to do: Speak the truth to each other, and render true and sounds judgment in your courts; do not plot evil against each other, and do not love to swear falsely. I hate all this,’ declares the Lord” (NIV).ReferencesBible, NIVhttp://search.proquest.com/docview/215198369?accountid=1208I have to respond to this
