Mountain Gas Company, a Large National Company Uses the LIFO

Essay

Mountain Gas Company, a large national company uses the LIFO inventory method for most of its inventories. Its inventory costs are heavily dependent on the price of petroleum. In 2015, when the price of oil was down, Mountain followed the lower of cost of market rule and wrote down its inventory by $880 million. In 2016, when the price of petroleum recovered, the company disclosed that the market price exceeded the LIFO carrying value by $10 billion.
Explain why the lower of cost or market rule resulted in a write-down during 2015. What is inconsistent about the treatment for 2015 and 2016, in terms of conservatism in accounting? If the price of petroleum declines significantly in 2017, what is the likely consequence?