P 8-8 Supplemental LIFO disclosures; Caterpillar 08-4 @ , LO8-6 @ Caterpillar, I

Question

P 8-8 Supplemental LIFO disclosures; Caterpillar 08-4 @ , LO8-6 @ Caterpillar, Inc, is one of the world's largest manufacturers of c nstruction, mining, and forestry machinery . The following disclosure note is included in the company's 2015 financial statements: Real World Financials D. Inventories ($in millions) Inventories are stated at the lower of cost or market. Cost is principally determined using the last-in, first-out (LIFO) method. If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,498 million and $2,430 million higher than reported at December 31, 2015 and 2014, respectively. Required: 1. The company reported LIFO cost of goods sold of S33,742 million. Calculate the amount that would be reported for cost of goods sold had Caterpillar used the FIFO inventory method for all of its inventory. 2. How does the amount in requirement 1 affect income before taxes? 3. Why might the information contained in the disclosure note be useful to a financial analyst?

Explanation / Answer

1) The company used FIFO method the cost of inventory would have been higher by $2498 million in $2430 in year 2015 and 2014 respectively so COGS would be higher by ($2498 - $2430)Million = $68 million. 2) The income before tax would be lower by $68 milion. 3)The information contained in the disclosure might be useful when they want to compare caterpillar company's inventory method with other companies in the industry exclusively using FIFO method.

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