Deciphering Financial Statements (Caterpillar and Ford Motor)
Ford Motor (automotive) and Caterpillar (heavy equipment) both use the LIFO inventory valuation method. Caterpillar uses it for 80% of its inventories and Ford for 25% of its inventories. Data from the 2004 10 K filings of these two companies follow (in millions of U.S. dollars):
|
|
Ford |
Caterpillar |
|
Cost of goods sold |
$135,856 |
$22,420 |
|
LIFO inventory, beginning |
9,151 |
3,047 |
|
LIFO inventory, ending |
10,766 |
4,675 |
|
LIFO reserve, beginning |
996 |
1,863 |
|
LIFO reserve, ending |
1,001 |
2,124 |
1. For both companies, as of the end of 2004, the existence of a LIFO reserve demonstrates that LIFO inventory is less than it would have been if FIFO had been used. For both companies, compute the ratio of LIFO inventory/FIFO inventory for 2004 ending inventory. Comment on the resulting numbers.
2. For Caterpillar, compute what 2004 cost of goods sold would have been if FIFO had been used.
3. What might have caused Caterpillar’s LIFO reserve to be so much larger than Ford’s?
4. If a company uses FIFO, can you use financial statement data to compute what its cost of goods sold would be using LIFO? Explain.