1 bought a retail store a year ago. I borrowed $400,000 from the bank to buy the business. Interest is $40,000 per year. The previous owner, Sally, showed me all the books before I bought it and it looked like a good deal. She and her husband had been running it themselves- last year they made $180,000 before taxes but they were planning to retire. I didn't want to quit my teaching job, so I figured that, if I. got a competent manager and a couple of clerks and paid them about $100,000 per year in total, they could operate it for me and l'd have $80,000 left over. After paying the interest on the loan, I estimated I'd make $40,000 per year before taxes. However, things don't seem to be going right. In 2020, Sally had the following results (she's an honest woman): Gross Sales Sales Returns Gross Purchases Purchase Allowances $1,050,000 100,000 600,000 50,000 200,000 (Sally and her husband didn't draw any salary, they just kept the net income, after taxes.) Operating Expenses Inventory, Jan 1, 2020 Inventory, Dec 31, 2020 220,000 200,000 Here are the numbers for 2021: Gross Sales Sales Returns $1,100,100 100, 100 700,000 60,000 200,000 100,000 40,000 150,000 Gross Purchases Purchase Allowances (excluding payroll and interest) Operating Expenses Payroll Expense Interest Expense Est. Inventory, Dec 31, 2021 For some reason I've had to borTow $30,000 more from my brother-in-law because l didn't have enough to pay the bank interest on the loan. Sales have obviously increased. Where did the money go? The manager says he doesn't know what's wrong. When I hired him, I told him our normal gross profit margin was about 40%. You've studied accounting. What's happening? Your Answer: Dear Harry, I've studied the information you sent me and have prepared the attached comparatve income statements for the years 2021 and 2020, which I attach to this letter for your review. In my expert opinion, there are a number of possible reasons why your business has not met your expectations, even allowing for the salaries and interest youknew you would have to pay. The possible explanations are. (continue on other pages)

Paragraph Styles I bought a retail store a year ago. I borrowed $400,000 from the bank to buy the business. Interest is $40,000 per year. The previous owner, Sally, showed me all the books before I bought it and it looked like a good deal. She and her husband had been running it themselves - last year they made $180,000 before taxes = but they were planning to retire. I didn't want to quit my teaching job, so I figured that, if I got a competent manager and a couple of clerks and paid them about $100,000 per year in total, they could operate it for me and I'd have $80,000 left over. After paying the interest on the loan, I estimated I'd make $40,000 per year before taxes. However, things don't seem to be going right. In 2020, Sally had the following results (she's an honest woman): Gross Sales $1,050,000 Sales Returns 100,000 Gross Purchases 600,000 Purchase Allowances 50,000 Operating Expenses 200,000 (Sally and her husband didn't draw any salary; they just kept the net income, after taxes.) Inventory, Jan 1, 2020 220,000 Inventory, Dec 31, 2020 200,000 Here are the numbers for 2021: Gross Sales $1, 100, 100 Sales Returns 100, 100 Gross Purchases 700,000 Purchase Allowances 60,000 Operating Expenses 200,000 (excluding payroll and interest) Payroll Expense 100,000 Interest Expense 40,000 Est. Inventory, Dec 31, 2021 150,000 For some reason I've had to borrow $30,000 more from my brother-in-law because I didn't have enough to pay the bank interest on the loan. Sales have obviously increased. Where did the money go? The manager says he doesn't know what's wrong. When I hired him, I told him our normal gross profit margin was about 40%. You've studied accounting. What's happening? Your Answer: Dear Harry, I've studied the information you sent me and have prepared the attached comparative income statements for the years 2021 and 2020, which I attach to this letter for your review. In my expert opinion, there are a number of possible reasons why your business has not met your expectations, even allowing for the salaries and interest you knew you would have to pay. The possible explanations are ... (continue on other pages)