Because the cost of a raw material such as crude oil varies over time, an oil company's inventory will include barrels of crude acquired at various prices.
When a barrel is taken from that inventory and sold for revenue, the company needs to subtract a cost for barrel to calculate the profit on that barrel. Under the FIFO method, a company uses the cost of the oldest oil in its inventory.
The company's decision to use the FIFO method for its North American inventory resulted in a US$511 million increase in previously reported net income for 2002, a US$446 million decrease in net income for 2001 and a US$269 million increase in net income for 2000.
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