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Analyzing Balance Sheets and Income Statements

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a. On the income statement, there is a line item called "Interest expense of Financial Products" in the Operating Costs section of the income statement and a line item called "Interest expense excluding Financial Products" in between Operating Profit and Consolidated Profit Before Taxes. Why might the company report its interest expense in two sections in this way?

b. Caterpillar reported $2.466 billion in research and development expenses during 2012. What argument could you make for recording those expenditures as assets? Why are they not recorded as assets?

c. On the asset section of Caterpillar's balance sheet, there are two line items for "deferred and refundable income taxes." Why aren't they combined and shown on one line?

d. Caterpillar reports $6.942 billion in Goodwill on December 31, 2012. What does this represent?

e. The balance sheet has a line called "Profit employed in the business." What do you think that means? What would most companies call this line item?

f. On the balance sheet, Caterpillar reports Treasury Stock of ($10.074 billion) and Common Stock of $4.481 billion. If Treasury Stock represents a company's purchases of it's own stock, how can the Treasury Stock number be larger than the Common Stock number?

g. Would you recommend someone who works for this company to continue staying with them? Give 3 reasons why.

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Solution Summary

This solution is comprised of a detailed explanation of specific items in the financial statements of Caterpillar, such as, "Interest expense of Financial Products", development expenses and deferred and refundable income taxes."

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a. On the income statement, there is a line item called "Interest expense of Financial Products" in the Operating Costs section of the income statement and a line item called "Interest expense excluding Financial Products" in between Operating Profit and Consolidated Profit Before Taxes. Why might the company report its interest expense in two sections in this way?

"Interest expense of Financial Products" is an expense item which is related to the revenue item called "Revenues of Financial Products". Since this revenue item is categorized as operating revenue within the operating section, then, the related expense should be also categorized as operating for matching purposes. With respect to the expense item "Interest expense excluding Financial Products", it is not related to any operating revenue so it must be classified as "Other ...

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