Champion Spark Plug Company

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4.2

CHAMPION SPARK PLUG COMPANY

FIFO vs. LIFO inventory valuation, cumulative and specific-year tiffects

ChamPion Spark Plug Company is a worldwide mm involved principally in the D.)anufacmrc, istn"bution,and Im""!'!"ng ~IUgs, d windshield engaged. in .. Champion is aJsowipers, and 1brough su other autOmotive ~ manufacmrlng coa~1'\gappUcation equipment. health-carc ~ent. and cold8:

drawn Steel. Listed on Ihc New .Yark StoCk Exchange Prior ~- 1989 (T"1Ckcr to

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Study C1ampion's Consolidated SwcmentS of Earnings for 19X1-19X3: ConsoUcWedBalance SheetS for 19X2-19X3 and 19XI-19X2 (assets section only), and note to the 19X3Fmancial Sutfl!ml!n1S. "IDvc:nrories:Changeto LIFO in .. _ 19X2. idcn~~:;n1mOWDS in the table 1. UsingthefinancialswcmentS belOW.Assume that the cff~vc taXrue for 'on d~ 19X2 and 19X3 was 46 percent. (Since it is actuiIly a fraction less than 46 Percent. my minor "unexplained"differences can be aaribated to rounding caors.) 19X3 19X2 19X1 b N.A. * a Inventories on LIFO basis e d c Invenumes on FIFO basis Omm1.nvc~ofswi1Ch to UFO IS of g N.A. f Decemb- 3 CII1 petaX basis . s~impact of switch to . L1FOon prerax j N.A.

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basis

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S~yearimpact laXbasis

-Not appIicabJe

of swi1chto L1FO011 after-

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N.A.

2. Using a~ enuy, show the cffccu on the December 31, 19X2b,1.ncc sheet of the 19X2 change in Champion's method of pdcing inventorYfrom FIFO to LIFO.

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3. Champion's operating earnings decreased slightly from $118.2 million in 19X1 to $114.1 million in 19X2. After fully recognizing the effects of the operating earnings. In other words, of the earnings change, how much apPCarSto be due to change in accounting rules for inventOries and how much appears to be due to other economic aCtivity? (Note: A precise numerical solution is not possible.) ___ 4. In nontcchnicallanguagc. explain what the company is ttying to ten its stockholdersin the thini paragraph of the note .entitled"Inventories:...