THE EFFECT OF REDUCTIONS IN INVENTORY QUANTITIES. The 1993

\ annual report for General Motors presented the following information in its inventory note:

Inventories are stated generally at cost, which is not in excess of market. The cost of substantially all U.S. inventories other than the inventories of Saturn Corporation (Saturn) and GM Hughes Electronics Corporation (GMHE) is determined by the last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method of inventory valuation had been used for inventories valued at LIFO cost, such inventories would have been about $2,519.0 million higher at December 31, 1993, and $2,668.1 million higher at December 31, 1992. As a result of decreases in U.S. inventories, certain inventory quantities carried at lower LIFO costs prevailing in prior years, as compared with the costs of current purchases, were liquidated in 1993 and 1992. These inventory adjustments improved pre-tax operating results by approximately $134.4 million in 1993, primarily from the sale of Allison Gas Turbine Division (AGT), and

$294.7 million in 1992.

REQUIRED:

1. Explain why the reduction in inventory quantities increased General Motors’ net income.

2. If General Motors had used the FIFO inventory costing method, would the reduction in ending inventory quantities have increased net income?  D-2