(Examining financial statements, LO 1, 6) The Convenience Store (or The Store)

is a family-run, unincorporated business owned and operated by the Shar family.

The Store offers food staples, basic household goods, newspapers and magazines, and candy, drinks, and snacks. The Store is operated 80% of the time by family members. Family members are not paid regular salaries. Instead, cash is distributed to family members as they require it. Income is allocated to family members with the purpose of minimizing taxes. Local people are hired to work in the store at other times, and they are paid the minimum wage.

The store is operated out of a building owned by the Shar family. The family lives in a large apartment above the store. The building has a 6%, $235,000 mortgage.

The Shar family obtains most of its food and household needs from the shelves of The Convenience Store. The Shar family will also often purchase goods and services through The Store for their own use. The Store has a fairly simple accounting system. Inventory is kept track of manually. Sales are recorded when a transaction is

“rung up” on the cash register. Not all transactions are rung up.

The Shar family has earned a satisfactory living from The Convenience Store, but running a store of this type is difficult because it is necessary to be open for business 18 hours a day, seven days a week. A representative of a small chain of convenience stores has recently approached the Shar family with a proposal to buy The Convenience Store. The chain’s executives feel the area where The Convenience Store operates has reached the necessary density to justify one of the chain’s stores.

The chain could open its store elsewhere in the area, but the executives feel that if it could buy The Convenience Store at a reasonable price it would obtain the best location in the area for the store and remove a source of competition.

As part of the negotiations, The Convenience Store has provided its income statements for the last two years to the chain. This is the first time that the chain has attempted to purchase an unincorporated, family-run store, and the controller is not sure what to make of the income statements. The controller has asked you to examine The Convenience Store’s income statements and to prepare a report identifying and explaining concerns you have with them. The controller would also like you to indicate any other information that should be obtained and explain the purpose of the information.

Required:
Prepare the report requested by the controller.

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The Convenience Store Income Statements For the Years Ended December 31, 2006 and 2007 Revenue Cost of merchandise sold Wages Utilities Supplies Amortization of capital assets* Advertising and promotion Interest on bank loans and mortgage Other expenses Net income 2006 2007 $285,000 $275,025 151,050 152,364 11,900 11,662 13,200 13,464 11,300 11,074 15,900 15,900 7,500 7,000 18,100 17,738 20,200 21,000 $ 35,850 $ 24,823