Analysis of Inventory
Difficulty level: Advanced
Inventory Accounting Policy
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 60 percent of total inventories at December 31, 2014, 2013 and 2012.
If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,430 million, $2,504 million and $2,750 million higher than reported at December 31, 2014, 2013 and 2012, respectively.
Source: Caterpillar Inc., Annual Report
Inventory Disclosure
Caterpillar Inc., Statement of Financial Position, Inventory
USD $ in millions
| Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | ||
|---|---|---|---|---|---|---|
| Raw materials | 2,986 | 2,966 | 3,573 | 3,872 | 2,766 | |
| Work-in-process | 2,455 | 2,589 | 2,920 | 2,845 | 1,483 | |
| Finished goods | 6,504 | 6,785 | 8,767 | 7,570 | 5,098 | |
| Supplies | 260 | 285 | 287 | 257 | 240 | |
| Inventories | 12,205 | 12,625 | 15,547 | 14,544 | 9,587 |
Source: Based on data from Caterpillar Inc. Annual Reports
| Item | Description | The company |
|---|---|---|
| Raw materials | Carrying amount as of the balance sheet date of unprocessed items to be consumed in the manufacturing or production process. Also includes purchased parts that will be used as components of a finished product. | Caterpillar Inc.'s raw materials declined from 2012 to 2013 but then slightly increased from 2013 to 2014. |
| Work-in-process | Carrying amount as of the balance sheet date of merchandise or goods which are partially completed, are generally comprised of raw materials, labor and factory overhead costs, and which require further materials, labor and overhead to be converted into finished goods, and which generally require the use of estimates to determine percentage complete and pricing. | Caterpillar Inc.'s work-in-process declined from 2012 to 2013 and from 2013 to 2014. |
| Finished goods | Carrying amount as of the balance sheet date of merchandise or goods held by the company that are readily available for sale. | Caterpillar Inc.'s finished goods declined from 2012 to 2013 and from 2013 to 2014. |
| Supplies | Carrying amount as of the balance sheet date of products used directly or indirectly in the manufacturing or production process, which may or may not become part of the final product. May also include items used in the storage, presentation or transportation of physical goods. | Caterpillar Inc.'s supplies declined from 2012 to 2013 and from 2013 to 2014. |
| Inventories | Carrying amount (lower of cost or market) as of the balance sheet date of inventories less all valuation and other allowances. Excludes noncurrent inventory balances (expected to remain on hand past one year or one operating cycle, if longer). | Caterpillar Inc.'s inventories declined from 2012 to 2013 and from 2013 to 2014. |
Adjustment to Inventory: from LIFO to FIFO
Adjusting LIFO Inventory to FIFO (Current) Cost
USD $ in millions
| Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | ||
|---|---|---|---|---|---|---|
| Adjustment to Inventories | ||||||
| Inventories at LIFO (as reported) | 12,205 | 12,625 | 15,547 | 14,544 | 9,587 | |
| Add: Inventory LIFO reserve | 2,430 | 2,504 | 2,750 | 2,422 | 2,575 | |
| Inventories at FIFO (adjusted) | 14,635 | 15,129 | 18,297 | 16,966 | 12,162 | |
| Adjustment to Current Assets | ||||||
| Current assets (as reported) | 38,867 | 38,335 | 42,524 | 38,128 | 31,810 | |
| Add: Inventory LIFO reserve | 2,430 | 2,504 | 2,750 | 2,422 | 2,575 | |
| Current assets (adjusted) | 41,297 | 40,839 | 45,274 | 40,550 | 34,385 | |
| Adjustment to Total Assets | ||||||
| Total assets (as reported) | 84,681 | 84,896 | 89,356 | 81,446 | 64,020 | |
| Add: Inventory LIFO reserve | 2,430 | 2,504 | 2,750 | 2,422 | 2,575 | |
| Total assets (adjusted) | 87,111 | 87,400 | 92,106 | 83,868 | 66,595 | |
| Adjustment to Equity Attributable To Common Stockholders | ||||||
| Equity attributable to common stockholders (as reported) | 16,746 | 20,811 | 17,532 | 12,883 | 10,824 | |
| Add: Inventory LIFO reserve | 2,430 | 2,504 | 2,750 | 2,422 | 2,575 | |
| Equity attributable to common stockholders (adjusted) | 19,176 | 23,315 | 20,282 | 15,305 | 13,399 | |
| Adjustment to Profit Attributable To Common Stockholders | ||||||
| Profit attributable to common stockholders (as reported) | 3,695 | 3,789 | 5,681 | 4,928 | 2,700 | |
| Add: Increase (decrease) in inventory LIFO reserve | (74) | (246) | 328 | (153) | (447) | |
| Profit attributable to common stockholders (adjusted) | 3,621 | 3,543 | 6,009 | 4,775 | 2,253 | |
Caterpillar Inc.'s inventory value on Dec 31, 2014 would be $14,635 (in millions) if the FIFO inventory method was used instead of LIFO. Caterpillar Inc.'s inventories, valued on a LIFO basis, on Dec 31, 2014 were $12,205 . Caterpillar Inc.'s inventories would have been $2,430 higher than reported on Dec 31, 2014 if the FIFO method had been used instead.
Adjusted Ratios: LIFO vs. FIFO (Summary)
Caterpillar Inc., adjusted ratios
| Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | ||
|---|---|---|---|---|---|---|
| Current Ratio | ||||||
| Reported current ratio (LIFO) | 1.39 | 1.40 | 1.43 | 1.33 | 1.44 | |
| Adjusted current ratio (FIFO) | 1.48 | 1.50 | 1.52 | 1.42 | 1.56 | |
| Net Profit Margin | ||||||
| Reported net profit margin (LIFO) | 7.09% | 7.19% | 9.01% | 8.59% | 6.77% | |
| Adjusted net profit margin (FIFO) | 6.94% | 6.72% | 9.53% | 8.32% | 5.65% | |
| Total Asset Turnover | ||||||
| Reported total asset turnover (LIFO) | 0.62 | 0.62 | 0.71 | 0.70 | 0.62 | |
| Adjusted total asset turnover (FIFO) | 0.60 | 0.60 | 0.68 | 0.68 | 0.60 | |
| Financial Leverage | ||||||
| Reported financial leverage (LIFO) | 5.06 | 4.08 | 5.10 | 6.32 | 5.91 | |
| Adjusted financial leverage (FIFO) | 4.54 | 3.75 | 4.54 | 5.48 | 4.97 | |
| Return on Equity (ROE) | ||||||
| Reported ROE (LIFO) | 22.06% | 18.21% | 32.40% | 38.25% | 24.94% | |
| Adjusted ROE (FIFO) | 18.88% | 15.20% | 29.63% | 31.20% | 16.81% | |
| Return on Assets (ROA) | ||||||
| Reported ROA (LIFO) | 4.36% | 4.46% | 6.36% | 6.05% | 4.22% | |
| Adjusted ROA (FIFO) | 4.16% | 4.05% | 6.52% | 5.69% | 3.38% | |
| Ratio | Description | The company |
|---|---|---|
| Adjusted current ratio | A liquidity ratio calculated as adjusted current assets divided by current liabilities. | Caterpillar Inc.'s adjusted current ratio deteriorated from 2012 to 2013 and from 2013 to 2014. |
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by revenue. | Caterpillar Inc.'s adjusted net profit margin deteriorated from 2012 to 2013 but then slightly improved from 2013 to 2014. |
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Caterpillar Inc.'s adjusted total asset turnover deteriorated from 2012 to 2013 and from 2013 to 2014. |
| Adjusted financial leverage | A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income. |
Caterpillar Inc.'s adjusted financial leverage declined from 2012 to 2013 but then increased from 2013 to 2014 exceeding 2012 level. |
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. | Caterpillar Inc.'s adjusted ROE deteriorated from 2012 to 2013 but then slightly improved from 2013 to 2014. |
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | Caterpillar Inc.'s adjusted ROA deteriorated from 2012 to 2013 but then slightly improved from 2013 to 2014. |
Adjusted Current Ratio
| Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| Current assets (USD $ in millions) | 38,867 | 38,335 | 42,524 | 38,128 | 31,810 | |
| Current liabilities (USD $ in millions) | 27,877 | 27,297 | 29,755 | 28,561 | 22,020 | |
| Current ratio1 | 1.39 | 1.40 | 1.43 | 1.33 | 1.44 | |
| Adjusted: from LIFO to FIFO | ||||||
| Adjusted current assets (USD $ in millions) | 41,297 | 40,839 | 45,274 | 40,550 | 34,385 | |
| Current liabilities (USD $ in millions) | 27,877 | 27,297 | 29,755 | 28,561 | 22,020 | |
| Adjusted current ratio2 | 1.48 | 1.50 | 1.52 | 1.42 | 1.56 | |
2014 Calculations
1 Current ratio = Current assets ÷ Current liabilities
= 38,867 ÷ 27,877 = 1.39
2 Adjusted current ratio = Adjusted current assets ÷ Current liabilities
= 41,297 ÷ 27,877 = 1.48
| Ratio | Description | The company |
|---|---|---|
| Adjusted current ratio | A liquidity ratio calculated as adjusted current assets divided by current liabilities. | Caterpillar Inc.'s adjusted current ratio deteriorated from 2012 to 2013 and from 2013 to 2014. |
Adjusted Net Profit Margin
| Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| Profit attributable to common stockholders (USD $ in millions) | 3,695 | 3,789 | 5,681 | 4,928 | 2,700 | |
| Sales of Machinery, Energy & Transportation (USD $ in millions) | 52,142 | 52,694 | 63,068 | 57,392 | 39,867 | |
| Net profit margin1 | 7.09% | 7.19% | 9.01% | 8.59% | 6.77% | |
| Adjusted: from LIFO to FIFO | ||||||
| Adjusted profit attributable to common stockholders (USD $ in millions) | 3,621 | 3,543 | 6,009 | 4,775 | 2,253 | |
| Sales of Machinery, Energy & Transportation (USD $ in millions) | 52,142 | 52,694 | 63,068 | 57,392 | 39,867 | |
| Adjusted net profit margin2 | 6.94% | 6.72% | 9.53% | 8.32% | 5.65% | |
2014 Calculations
1 Net profit margin = 100 × Profit attributable to common stockholders ÷ Sales of Machinery, Energy & Transportation
= 100 × 3,695 ÷ 52,142 = 7.09%
2 Adjusted net profit margin = 100 × Adjusted profit attributable to common stockholders ÷ Sales of Machinery, Energy & Transportation
= 100 × 3,621 ÷ 52,142 = 6.94%
| Ratio | Description | The company |
|---|---|---|
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by revenue. | Caterpillar Inc.'s adjusted net profit margin deteriorated from 2012 to 2013 but then slightly improved from 2013 to 2014. |
Adjusted Total Asset Turnover
| Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| Sales of Machinery, Energy & Transportation (USD $ in millions) | 52,142 | 52,694 | 63,068 | 57,392 | 39,867 | |
| Total assets (USD $ in millions) | 84,681 | 84,896 | 89,356 | 81,446 | 64,020 | |
| Total asset turnover1 | 0.62 | 0.62 | 0.71 | 0.70 | 0.62 | |
| Adjusted: from LIFO to FIFO | ||||||
| Sales of Machinery, Energy & Transportation (USD $ in millions) | 52,142 | 52,694 | 63,068 | 57,392 | 39,867 | |
| Adjusted total assets (USD $ in millions) | 87,111 | 87,400 | 92,106 | 83,868 | 66,595 | |
| Adjusted total asset turnover2 | 0.60 | 0.60 | 0.68 | 0.68 | 0.60 | |
2014 Calculations
1 Total asset turnover = Sales of Machinery, Energy & Transportation ÷ Total assets
= 52,142 ÷ 84,681 = 0.62
2 Adjusted total asset turnover = Sales of Machinery, Energy & Transportation ÷ Adjusted total assets
= 52,142 ÷ 87,111 = 0.60
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Caterpillar Inc.'s adjusted total asset turnover deteriorated from 2012 to 2013 and from 2013 to 2014. |
Adjusted Financial Leverage
| Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| Total assets (USD $ in millions) | 84,681 | 84,896 | 89,356 | 81,446 | 64,020 | |
| Equity attributable to common stockholders (USD $ in millions) | 16,746 | 20,811 | 17,532 | 12,883 | 10,824 | |
| Financial leverage1 | 5.06 | 4.08 | 5.10 | 6.32 | 5.91 | |
| Adjusted: from LIFO to FIFO | ||||||
| Adjusted total assets (USD $ in millions) | 87,111 | 87,400 | 92,106 | 83,868 | 66,595 | |
| Adjusted equity attributable to common stockholders (USD $ in millions) | 19,176 | 23,315 | 20,282 | 15,305 | 13,399 | |
| Adjusted financial leverage2 | 4.54 | 3.75 | 4.54 | 5.48 | 4.97 | |
2014 Calculations
1 Financial leverage = Total assets ÷ Equity attributable to common stockholders
= 84,681 ÷ 16,746 = 5.06
2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted equity attributable to common stockholders
= 87,111 ÷ 19,176 = 4.54
| Ratio | Description | The company |
|---|---|---|
| Adjusted financial leverage | A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income. |
Caterpillar Inc.'s adjusted financial leverage declined from 2012 to 2013 but then increased from 2013 to 2014 exceeding 2012 level. |
Adjusted Return On Equity (ROE)
| Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| Profit attributable to common stockholders (USD $ in millions) | 3,695 | 3,789 | 5,681 | 4,928 | 2,700 | |
| Equity attributable to common stockholders (USD $ in millions) | 16,746 | 20,811 | 17,532 | 12,883 | 10,824 | |
| ROE1 | 22.06% | 18.21% | 32.40% | 38.25% | 24.94% | |
| Adjusted: from LIFO to FIFO | ||||||
| Adjusted profit attributable to common stockholders (USD $ in millions) | 3,621 | 3,543 | 6,009 | 4,775 | 2,253 | |
| Adjusted equity attributable to common stockholders (USD $ in millions) | 19,176 | 23,315 | 20,282 | 15,305 | 13,399 | |
| Adjusted ROE2 | 18.88% | 15.20% | 29.63% | 31.20% | 16.81% | |
2014 Calculations
1 ROE = 100 × Profit attributable to common stockholders ÷ Equity attributable to common stockholders
= 100 × 3,695 ÷ 16,746 = 22.06%
2 Adjusted ROE = 100 × Adjusted profit attributable to common stockholders ÷ Adjusted equity attributable to common stockholders
= 100 × 3,621 ÷ 19,176 = 18.88%
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. | Caterpillar Inc.'s adjusted ROE deteriorated from 2012 to 2013 but then slightly improved from 2013 to 2014. |
Adjusted Return On Assets (ROA)
| Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| Profit attributable to common stockholders (USD $ in millions) | 3,695 | 3,789 | 5,681 | 4,928 | 2,700 | |
| Total assets (USD $ in millions) | 84,681 | 84,896 | 89,356 | 81,446 | 64,020 | |
| ROA1 | 4.36% | 4.46% | 6.36% | 6.05% | 4.22% | |
| Adjusted: from LIFO to FIFO | ||||||
| Adjusted profit attributable to common stockholders (USD $ in millions) | 3,621 | 3,543 | 6,009 | 4,775 | 2,253 | |
| Adjusted total assets (USD $ in millions) | 87,111 | 87,400 | 92,106 | 83,868 | 66,595 | |
| Adjusted ROA2 | 4.16% | 4.05% | 6.52% | 5.69% | 3.38% | |
2014 Calculations
1 ROA = 100 × Profit attributable to common stockholders ÷ Total assets
= 100 × 3,695 ÷ 84,681 = 4.36%
2 Adjusted ROA = 100 × Adjusted profit attributable to common stockholders ÷ Adjusted total assets
= 100 × 3,621 ÷ 87,111 = 4.16%
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | Caterpillar Inc.'s adjusted ROA deteriorated from 2012 to 2013 but then slightly improved from 2013 to 2014. |