Reference no: EM132514000

Question - 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?