A Company Provided the Following Disclosure Note to the Financial

question 120

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.
Required:
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:

Molecular Formula

The representation of the number and types of atoms present in a molecule, without indicating how these atoms are bonded or arranged.

π Bonds

Covalent bonds formed from the sideways overlap of p orbitals, allowing for electron density regions above and below the plane of the atoms.

Bond Dissociation Energies

The amount of energy needed to break a particular bond in a molecule into its constituent atoms in the gas phase.

Sigma Bonds

A bond formed by the direct overlap of atomic orbitals, leading to a covalent bond with electron density concentrated directly between the nuclei.