Question 1 (30 marks)

Read the content below in relation to the Caterpillar Financial Statements, and then answer the questions that follow.

Assume that the effective tax rate maintains a proportionate relationship to profit before tax when converting from LIFO to FIFO stock valuation.

The LIFO reserve for the year ended 31 December 2021 was $2 599 million, inventory was $14 038 million, and total assets were $82 793 million.

The Inventory Note from the Financial Statements is given below for ease of reference.

Caterpillar Inventories

“We state inventories at the lower of cost or net realisable value. We principally determine cost using the last-in, first-out (LIFO) method. The value of inventories on the LIFO basis represented about 65 per cent of total inventories on both 31 December 2023 and 2022, respectively. If the FIFO (first-in, first- out) method had been used, inventories would have been $3,423 million and $3,321 million higher than reported on 31 December 2023 and 2022, respectively.”

Source: Caterpillar Inc. 2023. Annual Report 2023 page 49 [Online]. Available from:
https://www.caterpillar.com/en/investors/reports/annual-report.html [Accessed: 2024-09-03].

1.1 Calculate the following values for Caterpillar Inc. using the FIFO method:

Note to student: present these values in $millions and show your workings.

1.1.1 Inventory value for 31 December 2021, 2022, and 2023. (1.5)

1.1.2 Cost of sales for 31 December 2022 and 2023. (3)

1.1.3 Net profit after tax for 31 December 2022 and 2023. (3)

1.2 For each of the ratios in Q1.2.1 to Q1.2.3:

• Calculate each ratio using the FIFO inventory valuation method for the years ending 31 December 2022 and 2023.
• Provide possible reasons for the movement in the FIFO ratios from
2022 to 2023 and possible ways to improve and/or maintain such ratios.
• Calculate each ratio using the LIFO valuation method for the year ending 31 December 2023.

1.2.1 Current ratio. (4.5)

1.2.2 Inventory turnover. (4.5)

1.2.3 Gross profit margin of the Manufacturing, Energy and Transport segments. (4.5)

1.2.4 Considering the LIFO and FIFO ratios for 31 December 2023 as calculated in Q1.2.1 to Q1.2.3, explain why the FIFO and LIFO ratios are different and the impact of this difference on the financial analysis. (2)

1.3 As an analyst, you are interested in efficiently using business resources.
The Chairman/CEO’s message in the 2023 annual report stated, “I am proud of our global team’s strong performance in 2023, delivering the best year in our 98-year history.”

Consider this in relation to the following questions:

1.3.1 Calculate the Return on Assets (ROA) using the formula
EBIT/(Average Total assets) on the LIFO basis for 31 December 2022 and 31 December 2023. (4)

1.3.2 Provide possible reasons for the move in the ratio from 2022 to
2023. Also, discuss any issues to be aware of going forward regarding these ratios and asset productivity and any improvements that could be implemented. (3)

Note to student: you are not expected to have dissected the full Caterpillar 2023 annual report. However, sensible suggestions should be made regarding the reasons for the movement in ROA, which can be done by reviewing the financial
statements and identifying issues in the information provided.

Question 2 (10 marks)

Read the content below and then answer the questions that follow. Questions
2.1 and 2.2 are calculations of Company A, and Question 2.3 requires you to gather information from the Caterpillar 2023 Annual Report.
The relevant defined benefit information for Company A, for the financial year ended 31 December 2023, is presented below:

The value of the defined benefit obligation was R40 500 on 1 January 2023, the beginning of the year.

2.1 From the defined benefit information for Company A given above, calculate the amounts that should appear in the Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2023. Show the profit and loss amount separate from the other comprehensive income amount. Show all your workings. (3)

2.2 Calculate the value of the defined benefit obligation at 31 December 2023. Show all your workings. (5)

2.3 Caterpillar discloses its post-retirement plan information on pages 69 to
72 of the 2023 Annual Report. List the value of the US pension benefit in terms of obligations, Plan Assets and Net Funded Status on 31 December 2023 and state the nature of the Net Funded Status. (2)
Question 3 (5 marks)

Read the content below, which relates to the Caterpillar Financial Statements you have already seen, and then answer the following questions.

Caterpillar has four primary segments into which it divides its revenue and a smaller “other segments” section. These are presented in the Segmental Revenue Report on page 21 of the Annual Financial Statements. Each of these segments is discussed in more detail from pages 1 to 4 and pages 21 to 25 of the Annual Report.

3.1 Identify the four reporting segments. (1)

3.2 Revenue is probably the most important figure in financial statements, as it represents the sustainable operating activities of a company (Milpark, FRAF01-8 Study Guide: 2016:63). It is also the figure that is most often manipulated through accounting policies due to its impact on profit and its proportional size. Information on the various ways in which Caterpillar generates its revenue is contained in the Annual Financial Statements for 2023 from page 22. Based on your insights gained from the revenue generated, discuss two ways that Caterpillar could misstate/manipulate its revenue and identify the red flags that you, as an analyst, could use to identify such misstatements. (4)

Question 4 (5 marks)

Information on investments held by a large corporate where you work as an analyst is presented below

4.1 Calculate the value of the portfolio on 31 December 2023. Show your workings. (2)

4.2 Identify the amount disclosed in Other Comprehensive Income for the year ended 31 December 2023. Explain if this is a gain or loss and the impact on Equity. Show your workings. (2)
4.3 State the amount of interest income that would be recorded for Government Bonds on 31 December 2023. (1)

Answers to Above Financial Questions

Answer 1: The inventory value for 31 December 2021, 2022, and 2023 for Caterpillar Inc using FIFO method is calculated as follows:

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