Reference no: EM132754992

Question: Albert owns a sports equipment store. Having little knowledge of accounting, he has hired Frank to keep the accounting records of the business. For 2018, the first year of operations, the store sold $7,600,000 of merchandise. Of this amount, $1,400,000 was still owed to the store by customers at year end. The store purchased and paid for merchandise costing $4,300,000 during 2018; $1,000,000 of this merchandise remained in inventory at year end.

The store also purchased and paid for $1,400,000 of equipment during the year. The equipment should have a useful life of 7 years. Thus depreciation expenses would be $200,000 each year. Other expenses amounted to $650,000, all paid for in cash. Frank has prepared the following income statement for 2018:

Revenues Expenses:

Merchandise Equipment Other

Total expenses Net loss $4,300,000 1,400,000 650,000

Albert Sports Equipment Store Income Statement

For Year 2018 $6,200,000 6,350,000 150,000

Albert is mystified by these results because he thought the store had been performing beyond his expectations. Frank assured him that his numbers were correct. He has offered to buy out the store, explaining that "he is willing to help Albert in this difficult time." Of course, Albert will lose much of his investment if he sells the store.

a. What problems do you see with the income statement given above?

b. Advise Albert as to whether he should sell out the store or not. To support your advice, prepare a revised income statement incorporating any changes you think appropriate.