Modern Industries manufactures a variety of computer parts and accessories in a rapidly changing technological environment. At year-end 2004, it reported the following comparative information regarding inventories.

The 2004 income statement reflected cost of sales of $3,165 million. In the operating activities section of the statement of cash flows, the $8 million decrease in inventories was added to net income. Notes to the financial statements included the following:
€¢ Inventories are reported at the lower of cost (first-in, first-out) or market. If the cost of the inventories exceeds their market (replacement) value, a write-down to market value is taken currently.
€¢ The company participates in a highly competitive industry that is characterized by rapid changes in technology, frequent introductions of new products, short product life cycles, and downward pressures on prices and margins.
Required
Answer the following questions related to Modern Industries€™ inventories.
A. Describe the nature of each of the three inventories listed on the balance sheet. When does each become an expense?
B. Why is the inventory decrease added to net income on the statement of cash flows?
C. Many U.S. corporations use the LIFO inventory method to save income taxes. Why might a computer industry manufacturer like this firm decide to use FIFO instead?Explain.

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(In millions) Raw materials and parts Work in process Finished goods 2004 $14 28 25 $67 2003 $16 31 28 $75 Total inventories