Case 1
Auto Parts, Inc.
Prepared by Andrew Overstreet
September 8, 2014
Auto Parts, Inc., a publicly held company, manufactured vehicle subassemblies for the
“big three” U.S. automakers. From 2010 to 2011, Auto Parts, Inc.’s total assets increased from
$47 million to $56 million, its total revenue from $60 million to $73 million, and its pretax
income increased from $5 million to $6 million. In 2011, a major expansion in the company’s
fixed asset spending took place after its brake valve division saw a notable increase in orders. In
addition, the amount of tooling supplies, or the parts used during the manufacturing process,
increased significantly. Previous to 2011, the tooling supplies were expensed when purchased,
but in early 2011 the Chief Financial Officer (CFO) deemed capitalization of the tooling supplies
to be the optimal method of accounting. The tooling supplies were from then on included under
“other current assets” until used, and at that time the company wrote a journal entry to expense
the cost of the supplies used. In 2010 at year end, Auto Parts, Inc. had $650,000 of tooling
expense and still held approximately $35,000 worth of tooling supplies. The next year while
