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Analysis of Inventory
Difficulty: Advanced
- Inventory Accounting Policy
- Inventory Disclosure
- Adjustment to Inventory: from LIFO to FIFO
- Adjusted Ratios: LIFO vs. FIFO (Summary)
- Adjusted Current Ratio
- Adjusted Net Profit Margin
- Adjusted Total Asset Turnover
- Adjusted Financial Leverage
- Adjusted Return on Equity (ROE)
- Adjusted Return on Assets (ROA)
Inventory Accounting Policy
Inventories are stated at the lower of cost or net realizable value. Cost is principally determined using the last-in, first-out (LIFO) method. The value of inventories on the LIFO basis represented about 65 percent and 60 percent of total inventories at December 31, 2017and 2016.
If the FIFO (first-in, first-out) method had been in use, inventories would have been $1,934 million and $2,139 million higher than reported at December 31, 2017 and 2016, respectively.
Source: Caterpillar Inc., Annual Report
Inventory Disclosure
Caterpillar Inc., Statement of Financial Position, Inventory
USD $ in millions
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
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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 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
| 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 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
| 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 2015 to 2016 but then slightly increased from 2016 to 2017. |
| 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 2015 to 2016 and from 2016 to 2017. |
| 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 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
Adjustment to Inventory: from LIFO to FIFO
Adjusting LIFO Inventory to FIFO (Current) Cost
USD $ in millions
Caterpillar Inc.'s inventory value on Dec 31, 2017 would be $11,952 (in millions) if the FIFO inventory method was used instead of LIFO. Caterpillar Inc.'s inventories, valued on a LIFO basis, on Dec 31, 2017 were $10,018 . Caterpillar Inc.'s inventories would have been $1,934 higher than reported on Dec 31, 2017 if the FIFO method had been used instead.
Adjusted Ratios: LIFO vs. FIFO (Summary)
Caterpillar Inc., adjusted ratios
| 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 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level. |
| 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 2015 to 2016 but then slightly improved from 2016 to 2017. |
| 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 2015 to 2016 but then improved from 2016 to 2017 not reaching 2015 level. |
| 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 increased from 2015 to 2016 and from 2016 to 2017. |
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. | Caterpillar Inc.'s adjusted ROE deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017. |
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | Caterpillar Inc.'s adjusted ROA deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017. |
Adjusted Current Ratio
2017 Calculations
1 Current ratio = Current assets ÷ Current liabilities
= ÷ =
2 Adjusted current ratio = Adjusted current assets ÷ Current liabilities
= ÷ =
| 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 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level. |
Adjusted Net Profit Margin
2017 Calculations
1 Net profit margin = 100 × Profit (loss) attributable to common stockholders ÷ Sales of Machinery, Energy & Transportation
= 100 × ÷ = %
2 Adjusted net profit margin = 100 × Adjusted profit (loss) attributable to common stockholders ÷ Sales of Machinery, Energy & Transportation
= 100 × ÷ = %
| 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 2015 to 2016 but then slightly improved from 2016 to 2017. |
Adjusted Total Asset Turnover
2017 Calculations
1 Total asset turnover = Sales of Machinery, Energy & Transportation ÷ Total assets
= ÷ =
2 Adjusted total asset turnover = Sales of Machinery, Energy & Transportation ÷ Adjusted total assets
= ÷ =
| 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 2015 to 2016 but then improved from 2016 to 2017 not reaching 2015 level. |
Adjusted Financial Leverage
2017 Calculations
1 Financial leverage = Total assets ÷ Equity attributable to common stockholders
= ÷ =
2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted equity attributable to common stockholders
= ÷ =
| 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 increased from 2015 to 2016 and from 2016 to 2017. |
Adjusted Return on Equity (ROE)
2017 Calculations
1 ROE = 100 × Profit (loss) attributable to common stockholders ÷ Equity attributable to common stockholders
= 100 × ÷ = %
2 Adjusted ROE = 100 × Adjusted profit (loss) attributable to common stockholders ÷ Adjusted equity attributable to common stockholders
= 100 × ÷ = %
| 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 2015 to 2016 but then slightly improved from 2016 to 2017. |
Adjusted Return on Assets (ROA)
2017 Calculations
1 ROA = 100 × Profit (loss) attributable to common stockholders ÷ Total assets
= 100 × ÷ = %
2 Adjusted ROA = 100 × Adjusted profit (loss) attributable to common stockholders ÷ Adjusted total assets
= 100 × ÷ = %
| 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 2015 to 2016 but then slightly improved from 2016 to 2017. |
