Why the lcm rule resulted in a write-down in the first year

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Reference no: EM13915085

ExxonMobil Corporation, the world's second-largest company, uses the LIFO inventory method for most of its inventories. Its inventory costs are heavily dependent on the cost of oil. When the price of oil was down, ExxonMobil, following the lower-of-cost-or-market (LCM) rule, wrote down its inventory by $325 million. In the next year, when the price of oil recovered, the company reported that market price exceeded the LIFO carrying values by $6.8 billion.11 Explain why the LCM rule resulted in a write-down in the first year. What is the inconsistency between the first- and second- year treatments of the change in the price of oil? How does the accounting convention of conservatism explain the inconsistency? If the price of oil declined substantially in a third year, what would be the likely consequence?

Reference no: EM13915085

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