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Investment Decisions for Big Spenders Inc. Background You are an Analyst for the professional service firm, FINACC LLP. Your
Additional Information Big Spenders Inc. has been working on diversifying its portfolio of investments and requires accountin
finance further expansion of operations. Popeyes Muscle Wash Ltd (PMWL) is a self-service, coin operated car wash located in
income statement is consistent with prior years. One of the first tasks in the analysis of the potential equity acquisition i
Auto Wash Bot Ltd. Income Statement For the Year Ended December 31, 2015 Revenue $375,000 Cost of Goods Sold 86,250 Gross Pro
2015 Revenue $375,000 Cost of Goods Sold 163,125 Gross Profit 211,875 Other Expenses Advertising 5,200 Office Expense 17,400

que1) what are the three problems is in these two income statement?

que) give your recomendation on the following case in which company they should invest?
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Answer #1

que1) what are the three problems is in these two income statement?

Answer : It seems that both company would have capital asset base since Popey's Muscle Wash has significant repair & maintenance expenses whereas auto robot have recently started research which might be require capital assets.

So it will be prudent to check that income statement is not ignoring amortisation/depreciation on capital assets

The research expenses part of Auto Robot provide distorted picture of profitability since research expenses may not be incurred in future hence it is important to seek confirmation on this point.

que2) give your recomendation on the following case in which company they should invest?

We have been provided value of Popey's Muscle Wash for 100,000 however no information is provided on value of Auto Robot.

Purely on review of income statement provided the recommendation will be to buy Auto Robot :

- The gross profit ratio of auto robot is 77% while Popey's Muscle wash is 56.5%. As business grows the fixed overhead expenses do not increase in same proportion hence company with higher gross margin is preferable.

- Further as discussed in question-1, the research expenses may not be incurred in future and after such adjustment the net profitability of auto robot might be 190600 i.e.50.83% whereas Popey's Muscle wash have net profit before tax of 54275 i.e. 14.47%

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