Lesson 2 of 11
The bridge between them
One disclosed number restates a LIFO company onto a FIFO basis. Caterpillar's inventories would have been $4,305 million higher at the end of 2025.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- US companies using LIFO must disclose what inventory would have been on a first-in, first-out basis. That difference is the LIFO reserve.
- Adding the reserve to inventory restates the balance sheet. The change in the reserve during a year restates that year's cost of sales.
- The restatement is a comparison tool, not a correction. The filed figures are correct as filed.
The previous lesson ended with a problem: a US company on LIFO and a foreign competitor on FIFO cannot be compared on gross margin or on inventory.
US rules solve it with one required disclosure. A company using LIFO has to say what the inventory would have been under the other method, and that single number lets a reader rebuild the balance sheet.
Caterpillar's inventories, as filed and restated
- Inventories as reported, 31 December 2025$18,135m
- LIFO reserve disclosed in the note+$4,305m
- Inventories on a first-in, first-out basis= $22,440m
The sentence that carries it
Caterpillar's fiscal 2025 10-K, filed on 13 February 2026, states that if the FIFO method had been in use, inventories would have been $4,305 million (Caterpillar Inc. FY2025 10-K, accession 0000018230-26-000008) and $3,864 million (Caterpillar Inc. FY2025 10-K, accession 0000018230-26-000008) higher than reported at 31 December 2025 and 31 December 2024 respectively.
Those are the reserve at two dates. Reported inventories were $18,135 million and $16,827 million, so on a FIFO basis they would have been $22,440 million and $20,691 million.
The reserve is 23.7 percent of the reported balance at the end of 2025. That is what decades of rising input costs look like sitting under a LIFO layer.
Two restatements, from one number
The reserve rose from $3,864 million to $4,305 million during 2025, an increase of $441 million. That is the amount by which LIFO charged more to cost of sales than FIFO would have, on the portion of inventories carried on that basis.
Three cautions before using it
The reserve applies only to the LIFO portion. Caterpillar states that about 70 percent of total inventories were on a LIFO basis at the end of 2025, so the restated figure is a mix of two methods and not a pure FIFO balance.
Restating profit upward does not restate the tax. A company on LIFO for its financial statements is on LIFO for tax, and the cash tax it actually paid is the lower figure. Adding the reserve to equity without a deferred tax adjustment overstates the effect.
And the restatement changes both sides of an inventory ratio. Inventory turnover uses cost of sales over inventory, and a FIFO restatement moves both, so the ratio does not move in the direction most people expect.
Why bother
Because the alternative is comparing numbers that were never comparable. Two companies making the same machines, one in Illinois and one in Bavaria, will report gross margins several points apart for a reason that has nothing to do with either business.
The reserve is the only disclosure in a US filing that closes that gap, and it is one sentence in the accounting policies note.
Check yourself
A company reports inventories of $18,135 million and a LIFO reserve of $4,305 million. What is inventory on a FIFO basis?
- $13,830 million
- $22,440 million
- $18,135 million, since the reserve is already included
Show the answer
Answer: B.
The reserve is the amount by which FIFO inventory would exceed the reported figure, so it is added. Here that is $18,135m plus $4,305m.The LIFO reserve rises by $441 million during a year. What does that say about cost of sales?
- Nothing, because the reserve is a balance sheet figure
- LIFO charged $441 million more to cost of sales than FIFO would have, so pre-tax profit was lower by that amount
- Cost of sales was $441 million lower
Show the answer
Answer: B.
The reserve is a cumulative difference. Its movement during a period is that period's difference in cost of sales, which is why the change and not the level restates profit.Why is it wrong to add the whole reserve to equity?
- The reserve is not a real number
- The company paid tax on the lower LIFO profit, so a restatement needs a deferred tax adjustment
- Equity cannot be restated
Show the answer
Answer: B.
US tax rules tie the book and tax methods together. The cash saved on tax is real, so the pre-tax restatement overstates the effect on the owners' claim.Sources
- Caterpillar Inc., FY2025 Form 10-K, filed 13 February 2026, accession 0000018230-26-000008, accounting policies note, for the LIFO reserve at 31 December 2025 and 2024, the proportion of inventories on a LIFO basis, and total inventories at both dates.
- ASC 330, Inventory, on the disclosure required when inventory is stated on a last-in, first-out basis.
What this leaves out
- The Caterpillar figures are history, read from the filing named. They are not a statement about the company today and not a view on any security.
- The restated FIFO figures are computed here from two filed numbers. Caterpillar does not print a restated balance sheet, and the restatement covers only the LIFO portion of inventories.
- The restatement ignores deferred tax, which is why the equity effect is smaller than the pre-tax effect.
- A LIFO layer liquidation releases very old costs into profit and distorts a single year's reserve movement. It is disclosed when material and is not modelled here.