pp 320-321 means pages 320-321. It\'s a reference to that page in the accounting
ID: 2556044 • Letter: P
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pp 320-321 means pages 320-321. It's a reference to that page in the accounting textbook. Image of page attached below.
ecision Case Suppose you are considering investing in two businesses, Tiger and Phil Mickelson Systems. The two companies are virtually identical, and began operations at the beginning of the current year. During the year, each pany purchased inventory as follows Woods leasuring profitability ased on different inventory nd depreciation methods 3 Jan. 4 10,000 units at $4 40,000 Apr. 6 Aug. 9 Nov. 2710,00 units at 7-70,000 Totals 5,000 units at S = 25,000 7,000 units at 642,000 32,000 $177,000 During the first year, both companies sold 25,000 unsof nventory. In early January, both companies purchased equipment costing $143,000 (10- estimated useful life and a $20,000 residual value). Woods uses the inventory depreciation methods that maximize reported income (FIFO and straight-line). contrast, Mickelson uses the inventory and depreciation methods that mini income taxes (LIFO and double-declining-balance). Both companies' trial bala at December 31 included the following: Sales revenue Operating $270,000 80,700 Requirements 1. Prepare both companies' income statements. (p. 346) 2. Write an investment letter to address the folowing questions for your clienc pears to be more profitabie? Which company has m Which company ap cash to invest in new projects? Which company would you prefer to invest in Why? (pp. 320-321) Format your investment letter as follows: INVESTMENT LETTER To: Our clients From: Student Name or Phil Mickelson Systems Subject for a long-term investmentExplanation / Answer
working notes 1 inventory valuation by FIFO & LIFO for both the companies rate amount FIFO Sales LIFO SALES Jan-04 10000 4 40000 10000 3000 Apr-06 5000 5 25000 5000 5000 Aug-09 7000 6 42000 7000 7000 Nov-27 10000 7 70000 3000 10000 32000 177000 25000 25000 BALANCE 7000 7000 7 4 49000 28000 2 Depriciation calcuation for both companies 1 by stright line method (Cost-salvage value)/estimated life (143000-20000)/10 12300 per year 2 double declining balances method Rate of Streigt line mehod*2 therefore depericiation will be 12300*2 24600 1 income statement for both companies Expenses Tiger wood Phill Revenues Tiger wood Phill Particualrs amount amount Particualrs amount amount sales revenue 270,000 270,000 Purchases 177,000 177,000 Inventory 49,000 28,000 operating expenses 80,700 80,700 depriciation 12,300 24,600 Net profit 49,000 15,700 319,000 298,000 319,000 298,000 2.1 Tiger wood company appears to be more profitable then phill as per income statement above. 2.2 in cash terms both companies having same amount of cash flow since cost and revenues are same , however Valuation method of inventory and depriciation differ therefore having difference in profits and higher profit compnay will get higher taxation and resulting lower cash flow 2.3 We would linke to invest in tiger wood company since FIFO menthod of inventory valuation is more near to market price and refelect near to acutal values of inventroy, on other hands in inflationery conditions LIFO gives lower values of inventory which leads to higher cost of productions and lower profits.
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