Caterpillar, Inc. (CAT) reports investments in affiliated companies, consisting mainly of its \(50 \%\) ownership of Shin Caterpillar Mitsubishi. Ltd. Caterpillar reports those investments on its balance sheet at \(\$ 582\) million, and provides the following footnote in its \(10-\mathrm{K}\) report.

a. What assets and liabilities of unconsolidated affiliates are omitted from CAT's balance sheet as a result of the equity method of accounting for those investments?

b. Do the liabilities of the unconsolidated affiliates affect CAT directly? Explain.

c. Compute CAT's reported profit from its investment in Shin as a percentage of Shin's reported profit. What percentage would we expect? Explain why the actual percentage is different from our expectation.

d. Both CAT and Shin include sales to each other in their respective income statements. Why are these intercompany sales not eliminated?

e. How does the equity method impact CAT's ROE and its RNOA components (net operating asset turnover and net operating profit margin)?

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Investments in unconsolidated affiliated companies Our investments in affiliated companies accounted for by the equity method consist primarily of a 50% interest in Shin Caterpillar Mitsubishi Ltd. (SCM) located in Japan. Combined financial information of the unconsolidated affiliated companies accounted for by the equity method (generally on a three-month lag, e.g., SCM results reflect the periods ending September 30) was as follows: Years Ended December 31 (Millions of Dollars) 2007 2006 2005 Results of operations: Sales.... Cost of sales. Gross profit.. Profit Caterpillar's profit.. $4,007 3,210 $4,420 $4,140 3,526 3,257 $ 797 $ 894 $ 883 $ 157 $ 187 $ 161 $ 73 $ 81 $ 73 Sales from SCM to Caterpillar of approximately $1.67 billion, $1.81 billion and $1.73 billion in 2007, 2006 and 2005 respectively, are included in the affiliated company sales. In addition, SCM purchased $268 million, $273 million and $282 million of products from Caterpillar in 2007, 2006 and 2005, respectively.