Suppose you are considering investing in two businesses, Bahama Bakery and Burgers Galore. The two companies are virtually identical, and both began operations at the beginning of the current year. During the year, each company purchased the following inventory:

During the first year, both companies sold 25,000 units of inventory.

In early January, both companies purchased equipment costing $150,000 that had a 10-year estimated useful life and a $20,000 residual value. Bahama Bakery uses the inventory and depreciation methods that maximize reported income. By contrast, Burgers Galore uses the inventory and depreciation methods that minimize income tax payments. Assume that both companies’ trial balances at December 31 included the following:

Sales revenue ......................... $350,000
Operating expenses* ............... 50,000

The income tax rate for both companies is 40%.

Requirements

1. Prepare both companies’ multiple-step income statements.

2. Which company appears to be more profitable? Which company has more cash to invest in promising projects? If prices continue rising over the long term, which company would you prefer to invest in? Why? (Challenge)

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Jan Apr 10,000 units at $4 = 5,000 units at S = 7,000 units at 6 = 4 40,000 25,000 Aug 9 42,000 Nov 27 10,000 units at 7= 70,000 $177,000 Totals 32,000