[laurnenw]

So I have to do a writing assignment for my accounting 201 class, and our professor didn't explain it at all. I think I know what the answer is, but it seems too easy and I wanted a second option:

Surelock Homes is a private investigator. In 1960, Mrs. E. Press Lee hired Surelock to investigate her husband. After working diligently for all of 1960, Surelock completed his investigation. Mrs. Lee paid him with a gold bullion worth $700,000. In 1961, Surelock was unable to work due to a back problem from carrying the buillion. Mr. Mort U. Wary agreed to take the weight off his back for $50,000. Homes sold it the bullion for $50,000 cash. Homes thinks his business is more successful in 1961 when he received $50,000 to expend than it was in 1960.
As Mr. Homes accountant, you are to write him a report, explaining which of the two years whas the best year for his business and why.


My assumption is that 1960 was the best year, as he earned $700,000.
However, he never worked in 1961 and still had an income of $50,000.
But he never got to keep the money from the previous year... he actually lost $650,000 in that transaction.

Do you have any thoughts?

[CaptainForest]

You can look at this problem from a couple of ways.

First, you make some very good points.

But, consider this:

In any business, cash flow is a problem. I can have a book value of net income of $1,000,000 a year, but if my customers don't pay me cash, I will go bankrupt.

In hindsight, selling it for 1/14 of its value was a bit silly, but when you are having liquidity problems, selling it for anything to keep you afloat is better then getting nothing for it and going bankrupt.

[laurnenw]

Thanks! I didn't think to approach the question in that manner, and it helped a lot and made a lot of sense.

That got me on the right track, but if anyone else has another point of view, its always greatly appreciated :)