# Supplemental Financial Information

## Information on the Effects of Changing Prices

Although inflation-adjusted information is an imprecise estimate, there are circumstances in which it can serve to emphasize the debilitating effects of inflation. It points out the importance of keeping inflation under control and sustaining public policy initiatives to encourage capital investment.

Rates of inflation continued to moderate in the United States and in many other countries throughout 1985. Despite this current positive trend, the cumulative effect of inflation over the past several years has generally eroded industry's ability to fund the replacement and expansion of productive capacity. This has not been the case with IBM.

The following supplemental information, which has been prepared in accordance with standards established by the Financial Accounting Standards Board, is intended to assist users of financial statements in understanding the impact of changing prices on the company's operations.

The data presented below reflect the effects on earnings and stockholders' equity resulting from using estimated changes in specific prices to restate the value of inventories and other properties at currently prevailing prices (current cost).

The estimates are based upon latest production costs, published price indexes, current suppliers' prices and appraised valuations. Cost of sales and depreciation expense are restated to reflect the change in the related asset values.

**Discussion of Financial Results**

IBM's 1985 financial results, when adjusted for changing prices, show a reduction of $2.46 million from reported net earnings and an increase in stockholders' equity of $2.648 million. The decrease in earnings results principally from increased depreciation expense of $270 million on plant, rental machines and other property that have been valued at $22,487 million to approximate current cost. Current inventories have been valued at $8,480 million on a current cost basis.

Companies which retain monetary assets or liabilities, such as cash or debt, incur gains and losses in purchasing power during periods of inflation. IBM's net monetary asset position resulted in a purchasing power loss of $124 million in 1985.

The effects of translation on the changes in specific prices of IBM's net assets have been estimated without any attempt to adjust the data for general rate of inflation differences among various countries. The translation adjustments reflect changes in the valuation of assets denominated in currencies other than the U.S. dollar which result from exchange rate fluctuations.

In dollars of average 1985 purchasing power, the increase in current costs that might have been expected from general inflation exceeded IBM's specific price level changes by $838 million. Management views this positively, in that technology and productivity improvements substantially offset inflation. Similar patterns are reflected in the prior years.

## Comparison of Selected Financial Data Adjusted for Changes in Specific Prices (Current Cost)

| As Reported in Financial Statements | 1985 | 1985 | 1984 | 1983 | 1982 | 1981 |
|--------------------------------------|------|------|------|------|------|------|
| Gross income from sales, services and rentals | $ 50,056 | $ 50,056 | $ 47,576 | $ 43,385 | $ 38,298 | $ 34,384 |
| Cost of sales, services and rentals | 21,103 | 21,156 | 19,792 | 17,916 | 15,355 | 14,151 |
| Expenses and other income | 17,334 | 17,527 | 16,084 | 15,118 | 14,038 | 13,001 |
| Provision for income taxes | 5,064 | 5,064 | 5,221 | 4,811 | 4,251 | 3,371 |
| Net earnings | $ 6,555 | $ 6,309 | $ 6,509 | $ 5,540 | $ 4,654 | $ 3,861 |
| Loss from decline in purchasing power of net monetary assets | $ 124 | $ 130 | $ 83 | $ 1 | $ 74 | - |
| Translation adjustments | $ 1,482 | $ 1,597 | $ (1,075) | $ (976) | $ (866) | $ (1,178) |
| Change in specific prices—net of general inflation | $ (838) | $ (707) | $ (78) | $ (342) | $ (1,373) | - |
| Stockholders' equity (net assets) at December 31 | $ 31,990 | $ 34,638 | $ 30,241 | $ 28,156 | $ 25,272 | $ 23,360 |
| Per share information: |
| Earnings per share | $ 10.67 | $ 10.27 | $ 10.65 | $ 9.13 | $ 7.81 | $ 6.57 |
| Cash dividends per share | $ 4.40 | $ 4.40 | $ 4.25 | $ 4.01 | $ 3.83 | $ 4.07 |
| Market price at December 31 | $ 155.50 | $ 127.52 | $ 131.73 | $ 107.28 | $ 107.28 | $ 67.28 |
| Average Consumer Price Index for all Urban Consumers (1967=100.0). | 322.2 | 311.1 | 298.4 | 289.1 | 272.4 | - |

The actual market price of IBM stock at December 31, for years 1981 to 1985 was $56.88, $96.25, $122.00, $123.13 and $155.50, respectively.