Following the 1990 Iraqi invasion of Kuwait, the price of crude oil soared, as did retail gasoline prices. This led the major U. S. oil companies to try to hold down their reported earnings. The oil companies were anxious to avoid a repeat of an earlier episode when crude oil and gasoline prices peaked during the 1970s, and earnings soared. At that time, the public outrage was so great that the US congress imposed an excess profits tax, taxing back several billion dollars of excess profits. Warnings of similar taxes were repeated in 1990. To limit their 1990 profits, the major oil companies did exercise some price restraint to keep prices at the pump from rising as much as they otherwise would. They also engaged in a number of accounting practice's, such as increased provisions for future environmental costs, increased maintenance, and large provisions for legal liabilities. (a) Between last in, first out (LIFO) and first in, first out (FIFO), which inventory accounting method would be most effective in holding down profits? Explain.
(b) Obviously, the major U. S. oil companies were concerned about political backlash. Do you think a strategy of holding down reported profit by means of accounting policy choice is effective in avoiding a backlash? Explain three reasons for why it is effect and one reason for why it is not effective.