Suppose you are considering investing in two businesses, Shelly’s Seashell Enterprises and Jeremy Feigenbaum Systems. The two companies are virtually identical, and both begin operations at the beginning of the current year. During the year, each company purchased inventory as follows:
Jan 4 10,000 units at $4 = $ 40,000
Apr 6 5,000 units at 5 = 25,000
Aug 9 7,000 units at 6 = 42,000
Nov 27 10,000 units at 7 = 70,000
Totals 32,000 $177,000
During the first year, both companies sold 25,000 units of inventory. In early January, both companies purchased equipment costing $143,000, with a 10-year estimated useful life and a $20,000 residual value. Shelly uses the inventory and depreciation methods that maximize reported income (FIFO) and straight-line). By contrast, Feigenbaum uses the inventory and depreciation methods that maximize income taxes (LIFO and double-declining-balance). Both companies’ trial balances at December 31 included the following:
Sales revenue………………………………….. $270,000
Operating expenses…………………………… 80,700
Requirements:
Prepare both companies’ income statements, and include them in a single Microsoft file as an attachment.
In addition, address the following items below:
• Discuss the implications of the selected depreciation and inventory methods.
• Which company appears to be more profitable?
• Which company has more cash to invest in new projects?
• In which company would you prefer to invest? State your rationale for your choice.
Jan 4 10,000 units at $4 = $ 40,000
Apr 6 5,000 units at 5 = 25,000
Aug 9 7,000 units at 6 = 42,000
Nov 27 10,000 units at 7 = 70,000
Totals 32,000 $177,000
During the first year, both companies sold 25,000 units of inventory. In early January, both companies purchased equipment costing $143,000, with a 10-year estimated useful life and a $20,000 residual value. Shelly uses the inventory and depreciation methods that maximize reported income (FIFO) and straight-line). By contrast, Feigenbaum uses the inventory and depreciation methods that maximize income taxes (LIFO and double-declining-balance). Both companies’ trial balances at December 31 included the following:
Sales revenue………………………………….. $270,000
Operating expenses…………………………… 80,700
Requirements:
Prepare both companies’ income statements, and include them in a single Microsoft file as an attachment.
In addition, address the following items below:
• Discuss the implications of the selected depreciation and inventory methods.
• Which company appears to be more profitable?
• Which company has more cash to invest in new projects?
• In which company would you prefer to invest? State your rationale for your choice.
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