Mitch Hopkins owns the Happy Valley Drug Store, which has prospered during its second year of operation. To help Hopkins decide whether to open another pharmacy in the area, his bookkeeper has prepared the current income statement of the business.
Hopkins recently read in an industry trade journal that a successful two-year-old pharmacy meets these criteria:
a. Gross margin is at least 50 percent.
b. Net income is at least $150,000.
Basing his opinion on the entity’s income statement data, Hopkins believes the business meets both criteria. He plans to go ahead with the expansion plan and asks your advice on preparing the pharmacy’s income statement in accordance with generally accepted accounting principles. When you point out that the income statement includes errors, Hopkins assures you that all amounts are correct.
Required
Prepare a correct multi-step income statement and make a recommendation about whether to undertake the expansion at this time.
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