Comparing Companies Assume that you are a financial analyst attempting to compare the financial results of two companies. The 2010 income statement of Straight Company is as follows:
Straight Company depreciates all operating assets using the straight-line method for tax purposes and for the annual report provided to stockholders. All operating assets were purchased on the same date, and all assets had an estimated life of five years when purchased. Straight Company’s reveals that on December 31, 2010, the balance of the Accumulated Depreciation account was $240,000.
You want to compare the annual report of Straight Company to that of Accelerated Company. Both companies are in the same industry, and both have the same assets, sales, and expenses except that Accelerated uses the double-declining-balance method for depreciation for income tax purposes and for the annual report provided to stockholders.
Develop Accelerated Company’s 2010 income statement. As a financial analyst interested in investing in one of the companies, do you find Straight or Accelerated to be more attractive? Because depreciation is a “noncash” expense, should you be indifferent in deciding between the two companies? Explain youranswer.