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Lingo vs. Reimer: Profitability Analysis

The document compares two companies, Lingo and Reimer, and their financial performance using different depreciation methods. It finds that when both use the straight-line depreciation method, Lingo is more profitable than Reimer. It also determines that Lingo generates more cash from operations than Reimer, so Lingo is in a better overall financial position.

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3 views2 pages

Lingo vs. Reimer: Profitability Analysis

The document compares two companies, Lingo and Reimer, and their financial performance using different depreciation methods. It finds that when both use the straight-line depreciation method, Lingo is more profitable than Reimer. It also determines that Lingo generates more cash from operations than Reimer, so Lingo is in a better overall financial position.

Uploaded by

thuhadt.yes20
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

B.

- Instead of using the declining-balance method, Lingo uses the straight-line method of
depreciation.
=> Annual depreciation of Lingo Company = 17,500 (the same with Reimer Company)

- For Lingo Company: Net income adjusted = old net income + old depreciation expense
- new annual
depreciation
Net income adjusted in 2019 = $68,000 + $38,000 ($16,000 + $12,000) - $17,500 = $88,500
Net income adjusted in 2010 = $76,000 + $32,800 ($15,200 + $17,600) - $17,500 = $91,300
Net income adjusted in 2011 = $85,000 + $28,520 ($14,440 + $14,080) - $17,500 = $96,020

- Comparison of net income between 2 companies when both using the straight-line method:
Lingo Company Net Income
Year Reimer Company
As Adjusted
2009 $84,000 $88,500
2010 $88,400 $91,300
2011 $90,000 $96,020
Total net income $262,400 $275,820

C.
1. When the two companies use the same straight-line method of depreciation

Reimer Company Lingo Company

$262,400 < $275,820

Lingo Company is more profitable than Reimer Company

2. When the two companies are using different depreciation methods


Based on the above analysis,, it can be seen that Lingo Company’s operations generate more
cash ($229,000 + $99,320 = $328,320) than Reimer Company’s ($262,400 + $52,500 =
$314,900).

Reimer Company Lingo Company

$262,400 + $52,500 = $314,900 < $229,000 + $99,320 = $328,320

Lingo Company’s earnings are generating more cash than the earnings of Reime Company
and Depreciation expense has no effect on cash. Cash generated by operations can be arrived
at by adding depreciation expense to net income.

So Lingo Company has more cash than Reimer Company

Inconclusion, Mrs. Vogts should buy Lingo Company. It not only is in a better financial
position than Reimer Company, but it is also more profitable.

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