Solution of the Case: a) If a company uses LIFO, the value of closing stock will be lesser than the value calculated under FIFO method and the closing stock will be lesser in LIFO due to the higher cost of sales which in turn would result in lesser gross profit. This is transferred to Profit & Loss Account/Income Statement/Statement of Financial Performance which in turn would result in lesser net profit & high tax savings as tax would be levied on lesser Net Profit.

Here Golf Challenge Corp. can use FIFO method to comply with the loan financing requirements and also because in FIFO method Net profit margin & current ratio would be higher as compared to LIFO method. LIFO usually produces higher cost of goods sold than does FIFO because more recently purchased goods (usually higher priced) are assumed sold first.

Net Profit Margin= Net Profit after Tax (In FIFO Net profit would be more due to value in Sales Revenue higher closing stock which result in higher net profit, For publicly traded companies on the S& P 500, the Average net profit margin is 8.5 percent)

Current Ratio=Current Assets (Higher Closing stock value is included in current assets, Current Liabilities generally ratio should be higher than 1.33:1 as per Industry standards)

Hence use of FIFO method may increase the net profit margin ratio as compared to LIFO method to meet the Bank’s requirement.(Refer: Case study that examines how a significant change in accounting principle will affect the financial condition and future funding situation of Thiel Machinery.)

b) Consistency and