Eads Heater Inc. & Glenwood Heating Inc.

1. Introduction:
Similar in locations, operations, and product, Glenwood Heating, Inc. and Eads Heater,
Inc. began operations in year 20X1. Both companies sell home heating units and
conduct identical yearly operations. Furthermore, because they function in the same
industry, they face similar economic conditions, challenges and opportunities.

2. Analysis:

The two are very similar in conditions and product they have, but they are different in
how they are managed. The differences are as follows:

1. Difference in Accounting Methods:

➔ Each company has its own distinct way of adhering to generally accepted
accounting principles (GAAP).

➔ Their prospective financial statements have an overall similarity but are

ultimately distinguishable due to differences in accounting methods.

2. Difference in Inventory Recording Method:

The two companies are using two separate methods to record inventory.
Glenwood Heating, Inc. uses the First In First Out (FIFO) method while
Eads Heaters, Inc. uses Last in Last Out (LIFO) method.

3. Difference in Income Statement:

As both companies are using different recording inventory methods, the

difference it is making is in the companies’ income statements. Glenwood has a
cost of goods sold of $177,000 while Eads has $188,000. And it could be due
to the rise in the cost of the product over time.

Glenwood has both; a higher gross profit and net income. But, Glenwood also
has a higher income tax.
 4. Difference in Bad Debts:

Glenwood is using only 1% of bad debts and Eads is using 5% percent.

This makes the difference in the balance sheet of each company.

5. Difference in Depreciation Methods:

➔ Both companies are using different methods to determine depreciation. This

makes the difference in both; the income statements and the balance sheets of
the companies. Glenwood is using the straight line method while Eads is using
the double declining balance method.

➔ As both are using different depreciation methods. Eads depreciates delivery

equipment at a faster pace than Glenwood, causing depreciation expense to be
higher and value of the equipment to be lower.

6. Difference in Equipment Rental Negotiation:

The companies have a difference in equipment rental negotiations. Glenwood

rents a piece of operating equipment every year while Eads negotiates a capital
lease agreement with the owner of the equipment. This means Eads depreciates
this equipment.

3. SOLUTION:

1. Considering the nature of the heaters industry and rising costs, using the FIFO (First
In, First Out) method could be advantageous for Eads. Using FIFO could result in a
lower cost of goods sold, potentially improving Eads' net income.

2. Considering the industry standards, Eads should switch to the straight-line method for
depreciation as it provides more even and consistent allocation of depreciation expense
over the asset's useful life. Which would result in lower depreciation expense in early
years, positively impacting Eads’ net income and potentially improving financial ratios.

4. Conclusion:

If I were to invest in one of the two companies featured in this case study, I would most
likely invest in Glenwood Heating Inc. As Glenwood implements a less conservative
approach and therefore, reports higher net income and retained earnings. This leads to
higher ratios than Eads. For Example, Glenwoods’s current ratio is 3.04 while Eads’ is
1.12.

Furthermore, Glenwood’s profit margin on sales is 0.23 while Eads’ is 0.18. Analysts
and users of financial statements look at ratios like these to determine whether or not to
invest in a company. I believe Glenwood is more likely to have buyers and investors of
stocks, based on their reports.

Stock prices will continue to rise because of potential for future cash flows evidenced by
improved ratios.

Therefore, they will have the capacity to grow and become even more successful.
Although it is worth mentioning that Eads has more cash on hand, I would still ultimately
invest in Glenwood Heating Inc.