Custom «Statement of Income» Essay Paper Sample

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).

Income Statement

Service revenue 14300

Unreported revenue 2100

+______

Total revenue16400 $

New manager's monthly salary 3000

Salary expenses 3400

Unreported expenses 2750

Utility expenses 900

+______

Total expense 10050 $

____________________

Monthly net income (adjusted) 6350 $

6350 x 20 = 127000

The monthly net income is 6350$, this means I would pay 127000 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

_______

144750$

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 18000$ 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 144750, either.

My second offer would be 127000$, but I certainly would not go above that.