Paul Seger, a friend of yours, is negotiating the purchase of an ex-terminating company called Complete Pest Control. Seger has been employed by a national pest control service and knows the technical side of the business. However, he knows little about ac-counting, so he asks for your assistance. The owner of Complete Pest Control, Greg Krum, pro-vided Seger with income statements for the past three years, which showed an average net income of $75,000 per year. The latest balance sheet shows total assets of $360,000 and liabilities of $60,000. Seger brings the following matters to your attention:

1. Krum is asking $375,000 for the firm. He told Seger that because the firm has been earning a 20 percent return on stockholders equity, the price should be higher than the net assets reported on the balance sheet. (Note: The return on stockholders equity is calculated as net income divided by total stockholders equity.)
2. Seger noticed that there was no salary expense reported for Krum on the income statements, even though he worked half-time in the business. Krum explained that, because he had other income, he withdrew only $15,000 each year from the firm for personal use. If he purchases the firm, Seger will hire a full-time manager to run the firm at an annual salary of $30,000.
3. Krums tax returns for the past three years report a lower net income for the firm than the amounts shown in the financial statements. Seger is skeptical about the accounting principles used in preparing the companys financial statements.

Questions:

1. Should Krums withdrawals of $15,000 per year affect the net income reported in the financial statements?
2. Could there be legitimate reasons for the difference between net income as shown in the financial statements and net income as reported on the tax returns, as mentioned in point 3?
3. How might Seger obtain additional assurances about the propriety of the companys financial statements?