Question: Following the 1990 Iraqi invasion of Kuwait the price of

Following the 1990 Iraqi invasion of Kuwait, the price of crude oil soared, as did retail gasoline prices. This led the major U. S. oil companies to try to hold down their reported earnings.
The oil companies were anxious to avoid a repeat of an earlier episode when crude oil and gasoline prices peaked during the 1970s, and earnings soared. At that time, the public outrage was so great that the U. S. Congress imposed an excess profits tax, taxing back several billion dollars of excess profits. Warnings of similar taxes were repeated in 1990.
To limit their 1990 profits, the major oil companies did exercise some price restraint to keep prices at the pump from rising as much as they otherwise would. They also engaged in a number of accounting practices, such as increased provisions for future environmental costs, increased maintenance, and large provisions for legal liabilities.

a. What pricing and accounting policy choices are predicted by contract theory, in response to increasing crude oil prices? Explain.
b. For a U. S. company what inventory accounting policy would be most effective in holding down profits? Explain.
c. Obviously, the major U. S. oil companies were concerned about political backlash. Do you think a strategy of holding down reported profits by means of accounting policy choice is effective in avoiding a backlash? Explain why or why not. 9. Many companies issue large numbers of stock options to executives and other employees.

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