Question

Suppose you are considering investing in two businesses, Tiger Woods Enterpes and Phil Mickelson Systems. The two companies are virtually identical, and he began operations at the beginning of the current year. During the year, each con! pany purchased inventory as follows: Jan. 4 Apr. 6 Aug. 9 Nov. 27 Totals 10,000 units at $4 = $ 40,000 5,000 units at S = 25,000 7,000 units at 6 = 42,000 10.000 units at 7 = _70.000 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 (10-ye estimated useful life and a $20,000 residual value). Woods uses the inventory and depreciation methods that maximize reported income (FIFO and straight-line). 1 contrast, Mickelson uses the inventory and depreciation methods that minimal income taxes (LIFO and double-declining-balance). Both companies' trial balance at December 31 included the following: Sales revenue...... Operating expenses $270,000 80,700 Requirements 1. Prepare both companies' income statements. (p. 346) 2. Write an investment letter to address the following questions for your clienee Which company appears to be more profitable? Which company has more 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 Subject Selecting Tiger Woods Enterprises or Phil Mickelson Systems for a long-term investment

Answer 1

1	Depreciation of Tiger Wood Enterprises
	( Straight line Method)		=	1,43,000-20,000/ 10 years
				=	12,300
	Variable Cost of Tiger Wood Enterprises for 25,000 units
	( FIFO)	(10,000 units*4)+(5000 units *5)+(7000 units*6)+(3000units*7)
	=	128,000
	Depreciation of Phil Mickelson system		( Double times the Depreciation Rate)
	( Double Declining Balance )	=	1/10 years *2times*100
	.
				=	20% of Opening Book Value
				=	1,43,000*20%
				=	28,600
	Variable Cost of Phil Mickelson system for 25,000 units
	(LIFO)	(10,000 units*7)+(7000units*6)+(5000units*5)+(3000 units*4)
	=	149,000
	Income Statement of Tiger Wood enterprises and Phil Mickelson System
	Particulars			Tiger Wood Enterprises	Phil Mickelson
					$ Amount			$ Amount
	Sales Revenue (25000 units)		270,000			270,000
Less:	Variable Cost ( as per above workings)	128,000			149,000
Less:	Depreciation ( as per above)		12,300			28,600
Less:	operating Expenses			80,700			80,700
	Profit				49,000			11,700
2
	Tiger Wood Enterprises appears to be more profitable company.
	Tiger Wood Enterprises has more cash to invest in new projects as its profit is more.
	I would like to invest in Tiger wood Enterprises because return on my investment will be more.
	To	our client
	From	Narayana (Student Name)
	Subject	Selecting Tiger Wood Enterprises for long term investment.