Accounting

posted by .

Max Stevenson owns a local drug store. During the past few years, the economy has been experiencing a period of high inflation. Stevenson has had the policy of withdrawing cash from his business equal to 80% of the company's reported net income. As the business has grown, he has had a CPA prepare the company's financial statements and tax returns. The following is a summary of the company's income statement for the current year:

Revenue $565,000

Cost of goods sold (drugs, etc) 395,000

Gross pofit on items sold 170,000

Operating expenses, including taxes 110,000

Net income 60,000

Even though the business has reported net income each year, it has experienced severe cash flow shortages. The company has had to pay higher prices for its inventory as the company has tried to maintain the same quantity and quality of its goods. For example, last year's cost of goods sold had a historical cost of $250,000 and a replacement cost of $295,000. The current year's cost of goods sold has a replacement cost of $440,000,. Stevenson's personal cash outflows have also grown faster than his withdrawals from the company due to increasing personal demands.

Stevenson asks you as a financial advisor how can the company have income of $60,000 yet he and the company still have a shortage of cash?

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. accounting

    Baldwin Products Company anticipates reaching a sales level of $6 million in one year. The company expects net income during the next year to equal $400,000. Over the past several years, the company has been paying $50,000 in dividends …
  2. English MLA Format

    I writing an essay on Stevenson's Dr. Jekyll and Mr. Hyde. When I use a quote, to put the page number at the end can I just do (37)or do I have to put (Stevenson 37). I have found it both ways on the internet and I don't have my MLA …
  3. accounting

    During the latest accounting period, the company experienced a net loss of $800,000 yet its cash increased $300,000 during the same period. What are some of the reasoning for this?
  4. economics today

    Suppose the economy has been experiencing zero inflation and five percent unemployment for several years. The government decides to lower the unemployment percentage by generating some inflation. You need to do the following:
  5. Foreign languages

    Can you please check these questions, Witeacher?
  6. ashford

    At the beginning of 2012, the Jeater Company had the following balances in its accounts: Cash $4,300 Inventory 9,000 Common Stock 10,000 Retained Earnings 3,300 During 2012, the economy experienced the following events: 1. Purchased …
  7. economics

    which of the following statements about inflation are true?
  8. Math

    An insurance company classifies drivers as low-risk, medium-risk and high-risk. Of those insured, 60% are low-risk, 30% are medium-risk and 10% are high-risk. After a study, the company finds that during a 1-year period, 1% of the …
  9. Math Help

    Data released by the Department of Education regarding the rate (percentage) of ninth-grade students that don't graduate showed that out of 50 states, ​ 16 states had an increase in the dropout rate during the past 2 years. ​18 …
  10. Can someone Help w/Math

    Data released by the Department of Education regarding the rate (percentage) of ninth-grade students that don't graduate showed that out of 50 states, 16 states had an increase in the dropout rate during the past 2 years. 18 states …

More Similar Questions