Peaks Inc. is a hiking store carrying hiking apparel and equipment. The store is at the end of its second year of operations and, as new businesses often do, is struggling a bit to be profitable. The cost of inventory items has increased just in the short time the store has been in business In the first year of operations the store accounted for inventory costs using the moving weighted average method. A loan agreement the store has with Dev Bank, its prime source of financing, require that the store maintain a certain gross profit and current ratio. The store's owner, Charlie Davis, is looking over Peaks' annual financial statements after year-end inventory has been taken. The numbers are not very favourable and the only way the store can meet the required financial ratios agreed upon with the bank is to change from the moving weighted average to the FIFO method of inventory. Charlie originally decided upon moving weighted average for inventory costing because he felt that moving weighted average yielded a better matching of costs to revenues. Charlie recalculates the ending inventory using FIFO and submits her income statement and balance sheet to the loan officer at the bank for the required bank review of the loan. As Charlie mails the financial statements to the bank, he gratefully reflects on the latitude he has as manager in choosing an inventory costing method. Questions: 1. Why does Peaks Inc's use of FIFO improve the gross profit ratio and current ratio? 2. Is the action by Peaks Inc's owner ethical and which parties should be notified of the change? 2