Evaluating Income Barbara Farzner has received financial statements from Green Corporation and Wilke Company and is attempting to determine which of the companies would be a better investment. The 2000 income statements of the two companies are as follows:

Although Green Corporation reports the higher net income, Barbara is concerned about the significance of several of the income statement amounts and seeks your advice:

a. Is operating income or net income a better indicator to use when evaluating companies? Explain.

b. Are the sale of land by Green and the sale of investments by Wilke likely to be recurring or infrequent? What impact is the sale of land likely to have on Green’s income next year? What impact is the sale of investments likely to have on Wilke’s income next year?

c. What is meant by a cumulative adjustment from a change in accounting principle? Will the deduction be repeated next year?

d. On the basis of the income statement data presented, in which company would you advise Barbara to invest? Explain why.

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Income Statement Item Revenue from sale of product Investment income Total revenue Green Wilke Corporation Company $520,000 $550,000 80,000 150,000 $600,000 $700,000 Cost of products sold $400,000 $350,000 Advertising expense 250,000 30,000 Other expenses 50,000 20,000 Total operating costs $700,000 $400,000 Operating income ($100,000) $300,000 Gain on sale of land 200,000 Cumulative adjustment Loss on sale of investments from change in ac- (160,000) counting principle Net income (200,000) $100,000 ($ 60,000)