The Wall Street Journal (April 17, 1998) reported that "Valero Energy Corp. said it will take a first-quarter charge of $37.7 million, or 43 cents per share, related to lower prices for crude oil and refined products. The energy-refining and marketing company characterized the writedown as an accounting ‘to reduce the carrying value of our crude oil and refined products inventories to their market value.'"
REQUIRED:
a. What exception to the principles of financial accounting is being followed by Valero when it writes down its inventories?
b. How would the write-down affect the financial statements?
c. How would the write-down affect the company's current ratio and its inventory turnover ratio (increase, decrease, or no effect)?
d. Explain how such a write-down could be used to manipulate earnings and what two reporting strategies Valero could be following.
e. If crude oil prices rebounded in 1999, explain how Valero, which uses U.S. GAAP, would account for the rebound. What if Valero used IFRS instead of U.S. GAAP?