Question

The following details are for questions 16–20. Each individual question will appear below the details. Caterpillar Inc (CAT) has the following excerpts from their financial statements: CAT Financial Statements Item December 31, 2016 December 31, 2015 December 31, 2014 Inventory (in $ Millions) 9,615 9,700 12,205 Net Income (in $ Millions) (67) 2,512 2,452 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, 2016 and 2015. If the FIFO (first-in, first-out) method had been in use, inventories would have been $1,639 million and $2,498 million higher than reported at December 31, 2016 and 2015, respectively. Assume a corporate tax rate of 35%. Question If CAT had used FIFO method instead of LIFO method...

The amount that would be added to CAT’s retained earnings at December 31, 2016, (rounded to the nearest million) is: Group of answer choices $1,390 Million $1,065 Million No change in retained earnings $749 Million

Answer 1

If the FIFO (first-in, first-out) method had been in use, inventories would have been $1,639 million and $2,498 million higher than reported at December 31, 2016 and 2015, respectively.

Note- Increase in closing stock will increase the profit and increase in opening stock will decrease the profit.

Impact-

	2016	2015	2014
Imact on Opening Stock	Increase by $2498 Million	No impact	No Impact
Impact On closing Stock	Increase by $1639 Million	Increase by $2498 Million	No impact
Net Impact on Profit(Before tax)	Decrease By $859 Million ($2498-$1639)	Increase by $2498 Million	No impact

Total Increase in before tax profit	$2498 Million (2015)
Total Decrease In before tax profit	($859) Million (2016)
Net increase in before tax profit	$1639 Million
Additional Tax	=$1639*35% = $573.65 Million
Net Increase in Retained earnings	=$1639-$573.65 =$1065.35 Million or $1065 Million (Round to nearest Million)