Question
. It is the usual accountant's story...a friend of your (John Dough) has purchased a small business knows that you are proficient at analyzing financial
. It is the usual accountant's story...a friend of your (John Dough) has purchased a small business knows that you are proficient at analyzing financial nd information. He has asked you to help him with hi financial analysis. He informs you of the followi ng background information: After 20 years of service at his prior job, John was burned out and considering a change. While Chri mas shopping, he was talking with a retail owner at a local mall and was informed that most retail stores mark up their prices 200%. John decided t quit his job and purchase and operate a retail toys and hobby shop. So after finding the right opportu- nity, in January of year 1, he purchased a small stone and inventory of toys /games for $300,000. He f nanced the purchase through the local bank, which loaned him 80% of the money at 7% for 10 years and required John to personally finance the other 20%. Since he is the owner of a small business, he has been operating it as a sole proprietor and not issued any stock. He is not paid a salary, but draws money out as needed. He has a full-time book- keeper who handles all his books and accounting functions. There are two full-time sales clerks that work in the store and stock inventory in storage or on the shelves as it is delivered. All three of these employees have worked for him since he opened his business. John started each of them out at about $25,000 per year and has given each of them raises every year (approximately 3% per year). Addition. ally, if the company has a good year (net income) e rewards the employees by paying each of them a bonus of 3% of the net income amount. The bo- nuses are paid in the following year (February) For years 1 and 2, he had some external accoun- tants prepare a compilation report. For years a 4 and 5 he had a different set of external accoun- tants prepare the compilation reports. The compi lation reports state that the books are kept on a accrual basis of accounting according to GAAP and that Property & Equipment is capitalized at cost and depreciated using the straight-line method over the
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