Custom Statement of Income essay paper sample
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My task was to answer the following questions:
1.Compute the monthly net income
2.Compute the owner's equity
3.Decide how much to offer for the business and give reasons.
To compute the monthly net income I had to create an income statement (for the buyer).
Service revenue 14300
Unreported revenue 2100
Total revenue 16400 $
New manager's monthly salary 3000
Salary expenses 3400
Unreported expenses 2750
Utility expenses 900
Total expense 10050 $
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Monthly net income (adjusted) 6350 $
6350 x 20 = 127 000
The monthly net income is 6350$, this means I would pay 127 000 at most. It is important to note that I included the datas that were given in the text, too (unreported expenses, unreported revenues, the salary of the new manager).
To get to know how much O'Henry wants to get for the business, I performed the following calculation (as O'Henry did not need a manager, I did not include the manager's salary int he net income):
Ending capital 137400
Unadjusted net income (+) 10000
Unreported expenses (-) 2750
Unreported income (+) 2100
Withdrawals (-) 2000
It is easy to see that O'Henry wants to get 17750 $ more than I can afford, so we either negotiate or the deal does not go through.
First I would offer him144 750$ on the understanding that he will work for me for 6 months as a manager (naturally that certain 17750 $ would serve as his salary that I would pay in advance, with the purchase price). I think this solution would be beneficial both for me and O'Henry. Part of the estimated profit is due to his personal connections and competence, besides I would have to hire a manager for a monthly salary of 3000 (that adds up to 18 000$ in a 6 month period) anyway and even then the profit is likely to be less than estimated for the transition period. By having him as my manager for some time, he could teach me (or the next manager) the finesse of business and then we would not have to suffer from the transition. I think it is an acceptable condition for O'Henry, too because he wants to sell the business quickly and this way he would still get the amount of money he wanted. Otherwise it might take him long to find a buyer, and since the buyer would perform the same calculations as I did, he would want to pay less than 144 750, either.
My second offer would be 127 000$, but I certainly would not go above that.