In its annual report, Caterpillar, Inc., a major manufacturer of farm and construction equipment, reported the following information concerning its inventories: Inventories are stated at the lower of cost or market. Cost is principally determined using the last-in, first-out (LIFO) method. The value of inventories on the LIFO basis represented about 65% of total inventories at December 31, 2011, and about 70% of total inventories at December 31, 2010 and 2009. If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,422 million, $2,575 million, and $3,022 million higher than reported at December 31, 2011, 2010, and 2009, respectively. On its balance sheet and income statement, Caterpillar reported 2011 2010 2009 Inventories $ 14,544 $ 9.587 $ 6,360 2011 2010 2009 Cost of goods sold $ 43.578 $ 30,367 $ 23,886 Required: Page 394 As a recently hired financial analyst, you have been asked to analyze the efficiency with which Caterpillar has been managing its inventory and to write a short report. Specifically, you have been asked to compute inventory turnover for 2011 based on FIFO and LIFO and to compare the two ratios with two standards: (1) Caterpillar for the prior year 2010 and (2) its chief competitor, John Deere. For 2011, John Deere's inventory turnover was 4.2 based on FIFO and 5.9 based on LIFO. In your report, include 1. The appropriate ratios computed based on FIFO and LIFO. 2. An explanation of the differences in the ratios across the FIFO and LIFO methods. 3. An explanation of whether the FIFO or LIFO ratios provide a more accurate representation of the companies' efficiency in use of inventory.
In its annual report, Caterpillar, Inc., a major manufacturer of farm and construction equipment, reported the following information concerning its inventories: Inventories are stated at the lower of cost or market. Cost is principally determined using the last-in, first-out (LIFO) method. The value of inventories on the LIFO basis represented about 65% of total inventories at December 31, 2011, and about 70% of total inventories at December 31, 2010 and 2009. If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,422 million, $2,575 million, and $3,022 million higher than reported at December 31, 2011, 2010, and 2009, respectively. On its balance sheet and income statement, Caterpillar reported 2011 2010 2009 Inventories $ 14,544 $ 9.587 $ 6,360 2011 2010 2009 Cost of goods sold $ 43.578 $ 30,367 $ 23,886 Required: Page 394 As a recently hired financial analyst, you have been asked to analyze the efficiency with which Caterpillar has been managing its inventory and to write a short report. Specifically, you have been asked to compute inventory turnover for 2011 based on FIFO and LIFO and to compare the two ratios with two standards: (1) Caterpillar for the prior year 2010 and (2) its chief competitor, John Deere. For 2011, John Deere's inventory turnover was 4.2 based on FIFO and 5.9 based on LIFO. In your report, include 1. The appropriate ratios computed based on FIFO and LIFO. 2. An explanation of the differences in the ratios across the FIFO and LIFO methods. 3. An explanation of whether the FIFO or LIFO ratios provide a more accurate representation of the companies' efficiency in use of inventory.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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(Financial Accounting, Libby, 10th Edition, CP7-5)
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Transcribed Image Text:CP7-5 Using Financial Reports: Interpreting Effects of the LIFO/FIFO Choice on Inventory Turnover
2 LO7-5, O 7-6
In its annual report, Caterpillar, Inc., a major manufacturer of farm and construction equipment, reported
the following information concerning its inventories:
Inventories are stated at the lower of cost or market. Cost is principally determined using the last-in,
first-out (LIFO) method. The value of inventories on the LIFO basis represented about 65% of total
inventories at December 31, 2011, and about 70% of total inventories at December 31, 2010 and 2009.
If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,422 million,
$2,575 million, and $3,022 million higher than reported at December 31, 2011, 2010, and 2009,
respectively.
On its balance sheet and income statement, Caterpillar reported
2011
2010
2009
Inventories $ 14,544 $ 9,587 $6,360
2011
2010
2009
Cost of goods sold $ 43,578 $ 30,367 $ 23,886
Required:
Page 394
As a recently hired financial analyst, you have been asked to analyze the efficiency with which Caterpillar
has been managing its inventory and to write a short report. Specifically, you have been asked to compute
inventory turnover for 2011 based on FIFO and LIFO and to compare the two ratios with two standards: (1)
Caterpillar for the prior year 2010 and (2) its chief competitor, John Deere. For 2011, John Deere's inventory
turnover was 4.2 based on FIFO and 5.9 based on LIFO. In your report, include
1. The appropriate ratios computed based on FIFO and LIFO.
2. An explanation of the differences in the ratios across the FIFO and LIFO methods.
3. An explanation of whether the FIFO or LIFO ratios provide a more accurate representation of the
companies' efficiency in use of inventory.
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