The current asset section from The Dow Chemical Company's 2007 annual report follows.

The Dow Chemical inventory footnote follows.
The following table provides a breakdown of inventories:

The reserves reducing inventories from a FIFO basis to a LIFO basis amounted to \(\$ 1,511\) million at December 31, 2007 and \(\$ 1,092\) million at December 31, 2006. Inventories valued on a LIFO basis, principally hydrocarbon and U.S. chemicals and plastics product inventories represented 34 percent of the total inventories at December 31, 2007 and 38 percent of total inventories at December 31, 2006 .

\section*{Required}

a. What inventory costing method does Dow Chemical use? As of 2007, what is the effect on cumulative pretax income and cash flow of using this inventory costing method? (Assume a \(35 \%\) tax rate.) What is the effect on 2007 pretax income and cash flow of using this inventory costing method.

b. Compute inventory turnover and average inventory days outstanding for 2007 (2007 cost of goods sold is \(\$ 46,400\) million). Comment on the level of these two ratios. Is the level what you expect given Dow's industry? Explain.

c. Dow provides the following additional disclosure in its inventory footnote: "A reduction of certain inventories resulted in the liquidation of some of the Company's LIFO inventory layers increasing pretax income \(\$ 321\) million in \(2007, \$ 97\) million in 2006 , and \(\$ 110\) million in 2005." Explain why a reduction of inventory quantities increased income in 2005, 2006 and 2007

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December 31 (in millions) Cash and cash equivalents Marketable securities and interest-bearing deposits. 2007 2006 $ 1,736 $2,757 1 153 Accounts and notes receivable Trade (net of allowance for doubtful receivables-2007: $118; 2006: $122)... 5,944 4,988 Other.... 3,740 3,060 Inventories 6,885 6,058 Deferred income tax assets-current. 348 193 Total current assets $18,654 $17,209