c. Explain how it is possible for a LIFO liquidation to decrease income as in 1998.

d. Excluding the effects of the LIFO liquidation, compute COGS for 1998 and 1999 using (i) The company's current accounting method (ii) The FIFO method

e. State and justify which of the following measures of COGS is most appropriate to use to measure Noland's profitability: (i) As reported (ii) As computed in part b (iii) As computed in part d

f. Describe how to use the inventory footnote data to adjust Noland's net worth (book value) to a current cost basis for 1998 and 1999. 19. [LIFO writedowns and liquidations] Caltex's 1999 net in- come of $390 million increased more than 100% from 1998 in- come of $193 million. A careful reading of the inventory footnote, however, reveals that: In 1998 and 1997, certain inventories were recorded at market, which was lower than the LIFO carrying value. Adjustments to market reduced net income $18 million in 1998 and $36 million in 1997. The marke: valuation ad- justment reserves established in prior years were elimi- nated in 1999 as market prices improved and the physical units of inventory were sold. Elimination of these reserves increased net income in 1999 by $71 million. Inventory quantities valued on the LIFO basis were re- duced at certain locations during the periods presented Such inventory redictions increased net income in 1999 by $41 million, and decreased net income by $4 million and $5 million (net of related market valuation adjust- ments of $1 million and $14 million) in 1998 and 1997, respectively.

a. Explain how the market value adjustments reduced income by $18 and $36 million in 1998 and 1997, respectively.

b. Explain why the elimination of the market value adjustments in 1999 increased income by $71 million rather than ($18 + $36) $54 million.

c. Explain how it is possible for a LIFO liquidation to decrease net income as it did in 1998.

d. Recompute 1998 and 1999 net income on a replacement cost basis after eliminating the effects of the market value adjust- ments and the liquidations Explain the effect on the trend in income over the two years.