The following information related to Caterpillar’s inventories is taken from its 2015 annual report. Use this information in answering the questions that follow. There were no LIFO liquidations in 2014 or 2015.

D. 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 60 percent of total inventories at December 31, 2015 and 2014. If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,498 million and $2,430 million higher than reported at December 31, 2015 and 2014, respectively.

7. Inventories

Inventories (principally using the LIFO Method) are comprised of the following:

Required:

1. By how much would pre-tax income for 2015 have differed had Caterpillar used FIFO for all of its inventory?

2. Explain whether Caterpillar’s input prices increased or decreased during 2015.

3. Explain whether Caterpillar owed more or less tax in 2015 because it was on LIFO instead of FIFO. Assume a 35% tax rate.

4. Assume that the U.S. Congress eliminates the use of LIFO. How much tax would Caterpillar owe based on its 2015 inventory if it transitions to FIFO for all of its inventory? Assume a 21% tax rate.

5. Compute how Retained earnings would change if Caterpillar changed to the FIFO method. Base your answer on the 2015 inventory amount and a 21% tax rate.

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December 31, (Millions of dollars) 2015 2014 Raw materials $ 2,986 Work-in-process Finished goods Supplies $2,467 1,857 5,122 2,455 6,504 260 254 Total inventories $9,700 $12,205