In the early 1980s, an oil glut caused Texaco, a LIFO user, to delay drilling, which cut its oil inventory levels by 16 percent. The LIFO cushion (i.e., the difference between LIFO and FIFO inventory values) that was built into those barrels over the year amounted to $454 million and transformed what would have been a drop in net income to a modest gain.
REQUIRED:
Explain how using LIFO could be interpreted as building “hidden reserves.”