A recent annual report for Quaker Oats included the following information: The Company adopted the LIFO cost flow assumption for valuing the majority of remaining U.S. Grocery Products inventories. The company believes that the use of the LIFO method better matches current costs with current revenues. The cumulative effects of this change on retained earnings at the beginning of the year is not determinable, nor are the pro forma effects of retroactive application of LIFO to prior years. The effect of this change on the current year was to decrease net income by $16.0 million, or $0.20 per share.

Required:

As a new financial analyst at a leading Wall Street investment banking firm, you are assigned to write a memo outlining the effects of the accounting change on Quaker's financial statements. Assume a 34 percent tax rate. In your report, be sure to include the following:

1. In addition to the reason that was cited, why did management adopt LIFO?

2. As an analyst, how would you react to the $0.20 per share decrease in income caused by the adoption of LIFO?