A new client has come to you looking for assistance in determining which of the tow businesses she should consider buying. Michelle Obama is looking to invest in a local small business. For the past few months, she has kept her ear to the ground for any new companies seeking financing and through this process, she has narrowed her decision to two companies. Mrs. Obama has the financial statements and selected financial information of each of these companies (see below) and is looking for professional comments. She wants you to help interpret the statements.

Required: Prepare a 1-2 page memo highlighting the critical issues. Mrs. Obama would appreciate your interpretation of the different accounting policies and other items and their impact on net income. The memo should include general comments but should also include detailed calculations as to the impact of the accounting policies and other items. Mrs. Obama is a strong businesswoman but not a strong accountant, thus, you must be sure to write the memo using terms and explanations she will understand.

Squish Candy Co. Income Statement For the Year Ended Dec. 31, 2006 Revenue $ 150,000 Cost of Goods Sold $ 65,000 Gross Profit $ 85,000 Allan Candy Co. Income Statement For the Year Ended Dec. 31, 2006 Revenue $ 300,000 Cost of Goods Sold $ 130,000 Gross Profit $ 170,000 Salaries Expense Depreciation Other Expenses Total Expenses Net Income 30,000 15.000 5,000 $ 50,000 35,000 Salaries Expense Depreciation Other Expenses Total Expenses Net Income (Loss) $ 60,000 $ 75,000 $ 40,000 $ 175,000 $ (5.000) Selected Financial Information: Both companies were created just one (1) year ago (this is the first year for depreciation on fixed assets) Squish Candy Co. uses straight line depreciation over a period of 10 years Allan Candy Co.'s total cost of fixed assets =$150,000 Allan Candy Co. uses declining balance depreciation and applies a rate of 50% Other than method of depreciation, the companies' accounting policies are the same. Allan Candy Co.'s "Other Expenses" of $40,000 include a $20,000 write-off of A/R (Allan Candy Co. uses the direct write-off method) and a $10,000 write-down of inventory