Answer Happy

CHRYSLER’S SWITCHES OF INVENTORY COST METHODS
Read the PDF files “Chrysler’s Switches of Inventory Cost
Methods” (PICTURE BELOW IS THIS PDF FILE) and
“Paying FIFO Taxes” (BELOW IS THE PDF FILE TYPED
OUT) and answer the following question:
Provide possible reasons why Chrysler Corporation switched its
inventory cost method from FIFO to LIFO in 1957. You should include
both theoretical arguments and firm- specific factors that drove
its decision for the switch. Explain the benefits and costs of this
switch.
Provide possible reasons why Chrysler Corporation switched its
inventory cost method from LIFO to FIFO in 1970. Provide the
following: (a) theoretical arguments for the switch from LIFO to
FIFO, (b) firm-specific factors that drove its decision to switch,
and (c) macro-economic factors that caused the switch to benefit
the firm. Explain the benefits and costs of this switch.
Paying FIFO Taxes: Your Favorite Charity
In times of inflation, using LIFO results in higher reported
cost of goods sold than using FIFO. Higher cost of goods sold means
lower gross profit and lower net income. On the one hand, you might
expect that firms would be reluctant to use LIFO in times of
inflation because they wouldn't want to report lower net income to
their stockholders and creditors. On the other hand, you might
expect firms to use LIFO in times of inflation to lower their
income taxes. With these conflicting incentives, which inventory
method do firms choose in times of inflation?
In 1974, the inflation rate in the United States, as measured by
change in the Consumer Price Index, reached double digits for the
first time. In response, more than forty U.S. corporations switched
from FIFO to LIFO, apparently deciding the benefit of lower income
taxes exceeded the cost of reporting lower profits. These tax
savings were not trivial. For example, by switching from FIFO to
LIFO, DuPont saved more than $200 million in taxes in 1974 and
could anticipate greater savings in the future. The savings are
real, but they are not permanent. In effect, adopting LIFO allowed
DuPont to postpone some of its tax obligations for what might be a
very long time.
Which firms did switch to LIFO? Professor Gary Biddle, writing
on the editorial page of the Wall Street Journal, identified
several firms that paid tens of millions of dollars in extra taxes
because they did not change from FIFO to LIFO. Why? One possibility
suggested tongue in cheek by Biddle is that these firms were very
civic- minded and continued using FIFO in order to voluntarily pay
extra taxes. Other possible reasons include the high bookkeeping
costs of implementing the switch, reluctance by
Chrysler Corp. 1989 Pay back tax $3 million per year Delayed Tax Payment $53 million for 20 years 1957 1970 Switched from FIFO to LIFO (Allowed by Tax Law) Switched from LIFO to FIFO Narrowing loss by $20 Million Boosting Inventories by $150 million 1970 Switch from LIFO to FIFO А Inventory +$150M Taxes Payable +$53M OE R.E. +$97M (cumulative effect of accounting method change) Do you think Chrysler's decision to switch from LIFO to FIFO was beneficial to its shareholders?