Effective January 1, 1970, Chrysler Corporation adopted the FIFO method for inventories previously valued by the LIFO method. The 1970 annual report stated, “This . makes the financial statements with respect to inventory valuation comparable with those of the other United States automobile manufacturers.”
The Wall Street Journal reported the following:
The change improved Chrysler’s 1970 financial results several ways. Besides narrowing the 1970 loss by $20 million it improved Chrysler’s working capital. The change also made the comparison with 1969 earnings look somewhat more favorable because, upon restatement, Chrysler’s 1969 profit was raised by only $10.2 million from the original figures.
Finally, the change helped Chrysler’s balance sheet by boosting inventories, and thus current assets, by $150 million at the end of 1970 over what they would have been under LIFO. As Chrysler’s profit has collapsed over the last two years and its financial position tightened, auto analysts have eyed warily Chrysler’s shrinking ratio of current assets to current liabilities.
To get the improvements in its balance sheet and results, however, Chrysler paid a price. Roger Helder, vice president and comptroller, said Chrysler owed the government $53 million in tax savings it accumulated by using the LIFO method since it switched from FIFO in 1957. The major advantage of LIFO is that it holds down profit and thus tax liabilities. The other three major auto makers stayed on the FIFO method. Mr. Helder said Chrysler now has to pay back that $53 million to the government over 20 years, which will boost Chrysler’s tax bills about $3 million a year.
Given the content of this chapter, do you think the Chrysler decision to switch from LIFO to FIFO was beneficial to its stockholders? Explain, being as specific as you can.

  • CreatedFebruary 20, 2015
  • Files Included
Post your question