Help!

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)

I have so far done the following shown below, please help with some more explanations?

Revenues Gross Sales Less: Sales Retirns Net Sales Cost Of Goods Sold: Beginning I nyertory Purchases Less: Purchase Allowances Less: Ending Inventory Total Cost of Goods Sold Gross Profit Less: Operating Expenses Less: Payroll Expenses Operating Income Less: Interest Expense Net Income %Sales M 96 Saks E Revenues 1,050,(I}0 110.53% Gross Sales $ 1,100,100 {100,000} -10.53% Less: Sales Retirns {100,100} 950,0\") 100.00% Net Sales 14113111} Cost of Goods mid: 220,000 23.16% Beginning Inventory 200,000 600,000 63.16% Purchases 700,000 {50,000} -5.26% Less: Purchase Allowances {60,000} {200,000} -21.05% Less: Ending Inventory {1501100} 570,000 60.00% Total Cost of Goods Sold 690,000 380,0\") 40.00% Gross Profit 310111} {200,000} -21.05% Less: Operating Expenses {2001100} - r 0.00% Less: Payroll Expenses {100,000} 180,!!!) 18.95% Operating Income 10,000 0 ' 0.00% Less: Interest Expense {401100} 180,!!!) 18.95% Net Income 110% - 10% 100%