(Supplement A) Analyzing the Effects of a Reduction in the Amount of LIFO Inventory
An annual report of ConocoPhillips contained the following note:
During 2008, certain international inventory quantity reductions caused a liquidation of LIFO inventory values resulting in a $39 million benefit to our R&M segment net income. In 2007, a liquidation of LIFO inventory values increased net income $280 million, of which $260 million was attributable to our R&M segment.
Required:
1. Explain why the reduction in inventory quantity increased net income for ConocoPhillips.
2. If ConocoPhillips had used FIFO, would the reductions in inventory quantity during the two years have increased net income ? Explain.
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