Caterpillar Accounting Case

ALL ANSWERS ASSUME A TAX RATE OF 35%

Even though the tax rate appears to be 1720 / 6725 = 25.57%

In answering the following questions, please refer to the financial statements of Caterpillar Inc. (CAT) and the relevant Notes to these statements at the end of this write-up.

1. What could be the cause(s) for the shift in LIFO-based inventory from 70% at December 31,
2010 to 65% at December 31, 2011?

A decrease in the replacement cost for Cat’s inventories, or an increase in the obsolescence of Cat’s older inventories could cause a decrease in the reported total value of Cat’s inventories from year to year.

2. a. What is the best estimate of the replacement cost (or current cost) of Caterpillar’s inventory as of December 2011? b. Why would the company bother to provide information about this?

14544 = 65% * X
14544 / .65 = 22,375.38

CAT would provide this information to insurance companies to determine the appropriate amount of insurance they should purchase to cover a potential loss of current inventories. Furthermore, this data could be used in the valuation of a company’s risk or benefits from keeping a certain level of inventories.

3. What was the amount of Caterpillar’s inventory purchases during 2011?

BB Inventory + Purchases – COGS = EB Inventory
9587 + X – 43578 = 14544
X = 14544 – 9587 + 43578 = 48535

4. How much cash did Caterpillar pay to its suppliers for inventory purchases during 2011?
(Hint: You have to consider both the change in Accounts Payable and the change in Inventory.)

BB A/P + Purchases – Payments = EB A/P
5856 + 48535 – Payments = 8161
5856 + 48535 – 8161 = Payments
Payments = 46230

5. How did the LIFO liquidation affect CAT’s operating income. How would it affect the net income? (In answering this question you have to estimate or assume the tax rate that CAT paid in 2009).

Operating income increased by $300 million. Assuming a tax rate of 35%, Net Income would be increased by 300 * .65 = $198 million in 2009.

6. What would CAT’s Cost of Goods Sold have been in 2011 if the FIFO method of inventory had been used for all of its U.S. inventories?

FIFO Reserve: 2575 – 2422 = 153
2011 COGS FIFO Conversion: 43578 + 153 = 43731

7. Has CAT reduced its taxes over the years by using LIFO? Explain. Estimate the amount of these tax savings. Did CAT lower or increase its tax bill for 2012 by using LIFO in that year? If so, by how much?

2010 COGS FIFO conversion: 3022 – 2575 = 447

In both 2010 and 2011, COGS would have been HIGHER under FIFO, leading to lower taxable income, and thus, lower income taxes.

COGS were an additional 153 in 2011 from using LIFO rather than FIFO. Therefore, CAT paid 153 * .35 = 53.55 in income taxes HIGHER than if they had used FIFO.

8. What would CAT’s net income have been if it had used FIFO for all of its inventories in 2011?

6725 + 153 = 6878
6878 * .65 = 4470.7

9. Compute CAT’s inventory turnover for 2011 using the most meaningful measure.

Using FIFO:
Inventory Turnover = COGS / Average Inventory
Inventory turnover = 43731 / {[(14544 + 2422) + (9587 + 2575)]/2}
= 43731/14564
=3.003