Using Financial Reports: Interpreting Effects of the LIFO/FIFO Choice on Inventory
Turnover In its annual report, Caterpillar, Inc., a major manufacturer of farm and construction equipment, reported the following information concerning its inventories: 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 70% of total inventories at December 31, 2008, and about 75% of total inventories at December 31, 2007 and 2006. If the FIFO (first-in, first-out) method had been in use, inventories would have been $3,183 million, $2,617 million, and $2,403 million higher than reported at December 31, 2008, 2007, and 2006, respectively. On its balance sheet, Caterpillar reported:

Required:
As a recently hired financial analyst, you have been asked to analyze the efficiency with which
Caterpillar has been managing its inventory and to write a short report. Specifically, you have been asked to compute inventory turnover for 2008 based on FIFO and LIFO and to compare the two ratios with two standards: (1) Caterpillar for the prior year 2007 and (2) its chief competitor, John Deere. For 2008, John Deere€™s inventory turnover was 4.9 based on FIFO and 7.3 based on LIFO. In your report, include:
1. The appropriate ratios computed based on FIFO and LIFO.
2. An explanation of the differences in the ratios across the FIFO and LIFO methods.
3. An explanation of whether the FIFO or LIFO ratios provide a more accurate representation of the companies€™ efficiency in use ofinventory.

Transcribed Image Text:

2007 2006 2008 $8,781 $7,204 Inventories $6,351 2008 2007 2006 Cost of goods sold $32,626 $38,415 $29,549