Comparing Companies Assume that you are a fi nancial analyst attempting to compare the fi nancial results of two companies. The 2010 income statement of Straight Company is as follows:

Sales $720,000 Cost of goods sold 360,000 Gross profi t $360,000 Administrative costs $ 96,000 Depreciation expense 120,000 216,000 Income before tax $144,000 Tax expense (40%) 57,600 Net income $ 86,400 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 fi ve years when purchased. Straight Company’s balance sheet 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.

Required Develop Accelerated Company’s 2010 income statement. As a fi nancial analyst interested in investing in one of the companies, do you fi nd Straight or Accelerated to be more attractive? Because depreciation is a “noncash” expense, should you be indifferent in deciding between the two companies? Explain your answer.

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