Suppose you are considering investing in two businesses, Zastre Associates and Chen Co. The two…

 
   

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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 2017. During the year, each company purchased inventory as follows: During 2017, both companies sold 30,000 units of inventory. In early January 2017, 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 first-in, 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, 2017, included the following: Sales revenue……………………………………………………………..$560,000 Operating expenses (excluding amortization expense)……………………110,000 Required 1. Prepare both companies income statements. 2. Write an investment newsletter to address the following 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?