Lesson 6 of 8
Paid, not used
Inventory and prepayments are money already spent sitting on the balance sheet as an asset. Caterpillar held $18,135 million of inventory 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
- An asset that is not cash, a receivable or an investment is usually a cost that has been paid and not yet charged.
- Inventory, prepayments and capitalised costs are all the same idea at different time scales.
- Every one of them is a future expense, so a balance growing faster than sales is a charge building up for later periods.
The fourth timing case is the one most people find hardest to see, because it looks like wealth. Money goes out, and instead of a cost the accounts record an asset.
The asset is real in the sense that something was bought. It is also, without exception, an expense that has not happened yet.
Caterpillar's inventory, and what it is made of
- Finished goods$8,725m48%
- Raw materials$7,434m41%
- Work in process$1,598m8.8%
- Supplies · total inventories 18,135$378m2.1%
Total$18,135m
Three versions of one idea
A prepayment is the short version. Fen Street Bindery paid twelve months of rent on 1 April and had used nine of them by the year end, so $3,000 remained an asset and became next year's cost.
Inventory is the middle version. Caterpillar's fiscal 2025 10-K, filed on 13 February 2026, shows total inventories of $18,135 million (Caterpillar Inc. FY2025 10-K, accession 0000018230-26-000008) at 31 December 2025: raw materials of $7,434 million, work in process of $1,598 million, finished goods of $8,725 million and supplies of $378 million. Every dollar of it will become cost of sales when the machine it belongs to is sold.
Capitalised costs are the long version. A machine bought for $48,000 with an eight-year life is $48,000 of expense spread over eight years, and $42,000 of it was still an asset at the end of year one.
The judgement inside the third version
Whether a cost becomes an asset or an expense is a real decision with real rules, and the rules are not the same for every kind of spending.
Buying a machine is capitalised without argument. Routine maintenance on the same machine is expensed. Internal software development is capitalised once the project passes a defined stage and expensed before that. Research is expensed always.
The consequence is arithmetic rather than opinion. A cost capitalised raises this year's profit and this year's assets and lowers the profit of every later year it is charged against. A cost expensed does the reverse. Cash is identical either way.
What to watch, and what it is not
The useful signal is the same in all three versions: a balance growing faster than the sales it serves.
Inventory rising twice as fast as revenue means the company built or bought goods the market has not taken, and those goods will either sell later or be written down. Prepayments and capitalised costs rising faster than revenue mean the queue of future charges is lengthening.
What it is not is proof of anything. A company stocking up before a launch, or ahead of a supply disruption it can see coming, produces the same shape as one whose products are not selling. The distinction is in the inventory note, the management discussion, and whether finished goods or raw materials did the rising.
Check yourself
What is an inventory balance, in accrual terms?
- Money the company holds
- A cost already paid that will be charged to profit when the goods are sold
- Revenue not yet recognised
Show the answer
Answer: B.
Inventory is spending parked on the balance sheet. It becomes cost of sales in the period of the sale it serves, which is matching applied to goods.A company capitalises $1,000 over five years instead of expensing it. What changes?
- Cash spent falls
- Year one profit is higher by $800 and every later year is lower, with cash identical throughout
- Total profit over five years rises
Show the answer
Answer: B.
Capitalisation moves when a cost hits profit, never whether it does and never the cash. The five years together are the same either way.Inventory grows twice as fast as revenue. What follows?
- The company is in trouble
- A question. Stocking ahead of a launch and goods that are not selling look identical in the ratio
- Profit has been overstated
Show the answer
Answer: B.
The split between raw materials and finished goods, the inventory note and the management discussion separate the two explanations. The ratio only says where to look.Sources
- Caterpillar Inc., FY2025 Form 10-K, filed 13 February 2026, accession 0000018230-26-000008, for the composition of inventories at 31 December 2025.
- ASC 330, Inventory, on measuring inventory and charging it to cost of sales.
- ASC 730, Research and Development, on expensing research as incurred.
What this leaves out
- The Caterpillar figures are history, read from the inventories note filed for that fiscal year. They are not a statement about the company today and not a view on any security.
- The capitalisation table uses invented round numbers so both treatments can be checked by hand.
- Caterpillar states inventory principally on a last-in, first-out basis, which changes what the balance means. That is the subject of its own lesson in the accounting standards course.
- Nothing here is advice about any security.