Chapter 8, Problem 8.8P

Supple mental LIFO disclosures; Caterpillar

• LO8–4, LO8–6

Real World Financials

Caterpillar, Inc., is one of the world’s largest manufacturers of construction, mining, and forestry machinery. The following disclosure note is included in the company’s 2015 financial statements:

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 $33,742 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?