Suppose you are an investment advisor, and you are looking at two companies to recommend to your clients, Shelly’s Seashell Enterprises and Jeremy Feigenbaum Systems. The two companies are virtually identical, and both began operations at the beginning of the current year. During the year, each company purchased inventory as follows:

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

During the first year, both companies sold 25,000 units of inventory. In early January, both companies purchased equipment costing $143,000, with a 10-year estimated useful life and a $20,000 residual value. Shelly uses the inventory and depreciation methods that maximize reported income (FIFO and straight-line). By contrast, Feigenbaum uses the inventory and depreciation methods that minimize income taxes (LIFO and doubledeclining- balance). Both companies’ trial balances at December 31, 2013, included the following:

Sales revenue	$270,000
Operating expenses	80,700

Requirements

1. Prepare both companies’ income statements. (Disregard income tax expense.)

2. Write an investment letter to address the following questions for your clients: 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?