A Company Provided the Following Disclosure Note to the Financial

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.