Measuring profitability based on different inventory and amortization methods 1. Net income: Zastre Associates, $116,000 DP10-1 Suppose you are considering investing in two businesses, Zastre Associates and Chen Co. The two companies are virtually identical, and both began operations at the beginning of 2020. During the year, each company purchased inventory as follows: Jan. 10 Mar. 11 Jul. 9 Oct. 12 Totals 12,000 units at $7 5,000 units at $9 10,000 units at $10 12,000 units at $11 39,000 = = $ 84,000 45,000 100,000 132,000 $361,000 During 2020, both companies sold 30,000 units of inventory. In early January 2020, both companies purchased equipment costing $400,000 that had a five-year estimated useful life and a $40,000 residual value. Zastre Associates uses the first- in, first-out (FIFO) method for its inventory and straight-line amortization for its equipment. Chen Co. uses the weighted-average method for inventory and DDB amortization. Both companies' trial balances at December 31, 2020, included the following: Sales revenue. $560,000 Operating expenses (excluding amortization expense)............. 110,000 Required 1. Prepare both companies' income statements. 2. Write a memo to address the following long-term investment questions for your clients: Which company appears to be more profitable? Which company will have more cash to invest in promising projects? Which company would you prefer to invest in? Why?
Measuring profitability based on different inventory and amortization methods 1. Net income: Zastre Associates, $116,000 DP10-1 Suppose you are considering investing in two businesses, Zastre Associates and Chen Co. The two companies are virtually identical, and both began operations at the beginning of 2020. During the year, each company purchased inventory as follows: Jan. 10 Mar. 11 Jul. 9 Oct. 12 Totals 12,000 units at $7 5,000 units at $9 10,000 units at $10 12,000 units at $11 39,000 = = $ 84,000 45,000 100,000 132,000 $361,000 During 2020, both companies sold 30,000 units of inventory. In early January 2020, both companies purchased equipment costing $400,000 that had a five-year estimated useful life and a $40,000 residual value. Zastre Associates uses the first- in, first-out (FIFO) method for its inventory and straight-line amortization for its equipment. Chen Co. uses the weighted-average method for inventory and DDB amortization. Both companies' trial balances at December 31, 2020, included the following: Sales revenue. $560,000 Operating expenses (excluding amortization expense)............. 110,000 Required 1. Prepare both companies' income statements. 2. Write a memo to address the following long-term investment questions for your clients: Which company appears to be more profitable? Which company will have more cash to invest in promising projects? Which company would you prefer to invest in? Why?
Financial Accounting: The Impact on Decision Makers
10th Edition
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Gary A. Porter, Curtis L. Norton
Chapter5: Inventories And Cost Of Goods Sold
Section: Chapter Questions
Problem 5.5AP
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Question
Transcribed Image Text:Measuring profitability based
on different inventory and
amortization methods
1. Net income: Zastre Associates,
$116,000
12000
27000
DP10-1
Suppose you are considering investing in two businesses, Zastre Associates and Chen Co.
The two companies are virtually identical, and both began operations at the beginning of
2020. During the year, each company purchased inventory as follows:
Jan. 10
Mar. 11
Jul. 9
Oct. 12
Totals
12,000 units at $7 = $ 84,000
5,000 units at $9
45,000
10,000 units at $10
100,000
12,000 units at $11
132,000
$361,000
39,000
=
-
During 2020, both companies sold 30,000 units of inventory.
In early January 2020, both companies purchased equipment costing $400,000 that had
a five-year estimated useful life and a $40,000 residual value. Zastre Associates uses the first-
in, first-out (FIFO) method for its inventory and straight-line amortization for its equipment.
Chen Co. uses the weighted-average method for inventory and DDB amortization. Both
companies' trial balances at December 31, 2020, included the following:
Sales revenue
Operating expenses (excluding amortization expense).
$560,000
110,000
Required
1. Prepare both companies' income statements.
2. Write a memo to address the following long-term investment questions for your clients:
Which company appears to be more profitable? Which company will have more cash
to invest in promising projects? Which company would you prefer to invest in? Why?
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