Reference no: EM131000604
Caterpillar, Inc., is one of the world's largest manufacturers of construction, mining, and forestry machinery. The following disclosure note is included in the company's 2008 financial statements:
D. Inventories ($ in millions)
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.
If inventories valued at LIFO cost had been valued at FIFO cost, net income would have been $447 million higher in 2008 and $169 million higher in 2007.
Required:
1. Approximate the company's effective income tax rate for the year ended December 31, 2008.
2. Why might the information contained in the disclosure note be useful to a financial analyst?
3. Using the income tax rate calculated in 1, how much higher (lower) would retained earnings have been at the end of 2008 if Caterpillar had used the FIFO inventory method for all of its inventory?
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