The Effect of Reductions in Inventory Quantities}

Hanna Motor Company, one of the country's largest automobile manufacturers, disclosed the following information about its inventory in the notes to its financial statements.

Inventories are stated generally at cost, which is not in excess of net realizable value. The cost of inventory is determined by the weighted average method. If the first-in, first-out (FIFO) method of inventory valuation had been used, inventory would have been about \(\$ 2,519\) million higher at December 31, 2018, and \(\$ 2,668\) million higher at December 31, 2017. As a result of decreases in the purchase price of inventory over time, inventory quantities carried at lower weighted average costs prevailing in prior years, as compared with costs of current purchases, were liquidated in 2018 and 2017. These inventory adjustments improved pre-tax operating results by approximately \(\$ 134\) million in 2018 and \(\$ 294\) million in 2017 .

\section*{Required:}
1. Explain why the reduction in inventory quantities increased Hanna Motor Company's net income.
2. If Hanna Motor Company had used the FIFO inventory costing method, would the reduction in ending inventory quantities have increased net income?
\section*{Case