EXERCISE 4–1 Assume you are analyzing the financial statements of ABEX Chemicals. Your analysis raises concerns with certain accounting procedures that potentially distort its operating results.

Required:

a. Data for ABEX Corp. is reported in Case 10–5. Using the data in Exhibit I of that case, describe how ABEX’s use of the FIFO method in accounting for its petrochemical inventories affects its division’s operating margin for each of the following periods:

(1) Years 5 through 7.

(2) Years 7 through 9.

b. ABEX is considering adopting the LIFO method of accounting for its petrochemical inventories in either Year 10 or Year 11. Recommend an adoption date for LIFO and justify your choice.