A Company Provided the Following Disclosure Note to the Financial

question 6

Essay

A company provided the following disclosure note to the financial statements in its newest annual report:
During the current and prior year,the company reduced certain inventory quantities that were valued at lower LIFO costs prevailing in prior years.The effect of these physical reductions was to increase after-tax earnings this year by $90 million,$.30 per share,and $98 million,or $.327 per share last year.
1.Explain why the reduction in inventory quantity increased after-tax earnings for this company.
2.If the company had been using FIFO costing,would the reductions in inventory quantity during the two years have increased after-tax earnings? Explain.

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Definitions:

Compounding

The process where the value of an investment increases because the earnings on an investment, both capital gains and interest, earn interest as time passes.

Return

The profit or loss derived from an investment over a certain period, expressed as a percentage of the investment's initial cost.

Concept

A general idea or understanding that is the foundation for further ideas, actions, or strategies.

Market's Volatility

The degree of variation of a trading price series over time, often measured by the standard deviation of returns.