Selecting accounting methods. Champion Clothiers, Inc., owns and operates 80 New England retailing establishments that specialize in quality men's and women's clothing. James Champion established the company many years ago, and members of the Champion family have run the company ever since. Currently, Ronald Champion, grandson of the founder, is president and chief executive officer. Members of the Champion family hold all of the company's shares.
The setting for this case is March 2003. Ronald Champion and the company's accountant, Tom Morrissey, engage in the following conversation.

Champion (president): "Tom, you said on the telephone that the financial statements for 2002 are now complete. How much did we earn in 2002?"
Morrissey (accountant): "Net income was \(\$ 800,000\), with earnings per share at \(\$ 1.60\). With the \(\$ 1.20\) per share earned in 2000 and \(\$ 1.38\) earned in 2001 , we have maintained our 15 -percent growth rate in profits."
Champion: "That's great! Tom, at our board meeting next week I am going to announce that the Champion family will take the company public. We will be issuing shares equal to a 40 -percent stake in the company early in 2004. It is important that our earnings for 2003 continue to reflect the growth rate we have been experiencing. By my calculations, we need an earnings per share for 2003 in the neighborhood of \(\$ 1.84\). Does this seem likely?"
Morrissey: "I'm afraid not. Our current projections indicate an earnings per share around \(\$ 1.65\) for this year. Major unexpected style changes earlier this year left us with obsolete inventory that will have to be written off. In addition, increased competition in several of our major markets is putting a squeeze on margins."
Champion: "I know you accountants have all kinds of games you can play to doctor up the numbers. There must be something we can do to increase earnings to the desired level. What about our use of LIFO for inventories?"
Morrissey: "We have used LIFO in the past because it reduces income and saves taxes during a period of rising prices. The more recent, higher acquisition costs of inventory items enter into the computation of cost of goods sold in the income statement. The older, lower acquisition prices form the basis for the valuation of inventory on the balance sheet. We could switch to FIFO for 2003. That would add about \(\$ 0.21\) to earnings per share. However, we would probably have to use FIFO for tax purposes as well, increasing our taxes for the year by about \(\$ 50,000\)."
Champion: "I don't like paying more taxes, but FIFO certainly more closely approximates the physical flow of our goods. If we decide to stay on LIFO, is there anything we can do in applying the LIFO method to prop up earnings?"
Morrissey: "We now classify our inventory very broadly into two LIFO groups, or pools: one for men's clothing and one for women's clothing. We do this to minimize the possibility of dipping into an old LIFO layer. As you will recall, if we sell more than we purchase during a given period, we dip into an old LIFO layer. These LIFO layers use acquisition costs of the year the layer was added as the basis for their valuation. Some of these layers reflect costs of the mid-1950s. When we dip into one of these layers, we have to use these old, lower costs in figuring cost of goods sold and net income. By defining our LIFO pools broadly to include our dollar investment in men's clothing and our dollar investment in women's clothing, we minimize the probability of liquidating an old LIFO layer. We could define our LIFO pools more narrowly to increase the possibility of dipping. We could then let the inventory of particular items run down at the end of the year, dip into the LIFO layer to increase earnings, and then rebuild the inventory early in the next year. I suspect we could add about \(\$ 0.02\) a share to 2003 earnings if we used narrower pools."
Champion: "We own all of our store buildings and display counters. Is there anything we can do with depreciation expense?"
Morrissey: "We now depreciate these items using the shortest lives allowed and the fastest write-off permitted by tax law. However, whereas we have to use LIFO for financial reporting if we use it for tax reporting, we do not have to calculate depreciation for financial reporting in the same way as we do for tax reporting. We could depreciate these items over the expected economic life of each asset, which would be longer than the tax life. That should add about \(\$ 0.04\) to earnings per share for 2003 . We could also use the straight-line depreciation method for financial reporting.

Although our depreciable assets probably decrease in value faster than the straightline method indicates, we would be using the depreciation method that most of our competitors use for financial reporting. The use of straight-line depreciation would add another \(\$ 0.08\)."
Champion: "Now you're talking. What else can we do?"
Morrissey: "Well, there is one thing we can do very easily with our pension plan to improve earnings. When we adopted the pension plan two years ago, we gave all employees credit for their service prior to adoption. This created an immediate obligation for past service. We are amortizing this obligation as a charge against earnings over a 10 -year period. GAAP permit us to use 15 years instead of 10 years as the amortization period; that switch would increase earnings per share by \(\$ 0.05\) for 2003."
Champion: "All of the things you have suggested deal with the selection or application of accounting methods. Can we do anything with the timing of expenditures to help 2003 earnings?"
Morrissey: "Well, we could postpone painting and other maintenance of our stores scheduled for the last quarter of this year until the first quarter of next year. That would add \(\$ 0.02\) to earnings per share. In addition, we anticipate running a major advertising campaign just after Christmas. Although the advertising expenditure will be in 2003 and will reduce earnings per share by \(\$ 0.03\), we will realize all of the benefits of the campaign by way of greater sales early in 2004."
Champion: "I hadn't realized how much flexibility we had for managing our earnings. Before we decide which choices to make, can you think of any other avenues open to us?"
Morrissey: "We could always sell off assets on which we have potential gain. For example, we hold some marketable securities that we purchased last year. Selling those securities would net us an additional \(\$ 0.02\) in earnings per share. In addition, we own two parcels of land that we hope to use someday for new stores. We could sell these parcels at a gain of \(\$ 0.04\) per share."
Champion: "It strikes me that these alternatives could increase earnings per share for 2003 to the \(\$ 2.00\)-plus range. This level is a lot more appealing than the \(\$ 1.65\) per share anticipated for the year. Will we have to do anything to earnings per share for prior years if we adopt any of these alternatives?"
Morrissey: "I have set out in Exhibit 14.11 the impact of each of the choices on earnings per share for 2003 , as well as any restatement required for prior years. This summary should help us decide on our strategy."
How much do you think Champion Clothiers should report as earnings per share for 2003? Indicate the avenues you would choose (from among those described by Tom Morrissey) to arrive at your recommended earnings per share amount, and state the justification for your choices.