$(2)$

Measuring profitability based on different inventory and amortization methods

Net income: Zastre Associates, $$116,000$

DP$10-1$

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. $10,12,000$ units at $$7=$$$84,000$

Mar. $115,000$ units at $$9=45,000$

Jul. $9,10,000$ units at $$10=100,000$

Oct. $12,12,{000}_u$nits $at$ $$11=132,{000}_{?}$

Totals $39,{000}_{?}$

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 firstin, 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

Prepare both companies' income statements.

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?