City Computers reported the information shown below:

Required
1. Is City Computers a merchandising entity, a service business, or both? How can you tell? List the items in City Computers' financial statements that influence your answer.
2. Compute City Computers' gross margin for fiscal years 2017 and 2016. Did the gross margin increase or decrease in 2017? Is this a good sign or a bad sign about the company?
3. Write a brief memo to the owner advising her of City Computers trend of sales, gross margin, and net income. Indicate whether the outlook for City Computers is favourable or unfavourable based on these trends. Use the following memo format:
Date: ___________________________
To: The Owner
From: Student Name
Subject: Trend of sales, gross margin, and net income for City Computers

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CITY COMPUTERS Income Statement Dollars in thousands) Fiscal Year Ended January 31, 2017 $10,000 January 31, 2016 Net sales $9,550 Cost of goods sold Selling, advertising, general, and administrative Amortization Other expenses Interest expense Other income (expenses) 7,300 1,830 186 54 90 (17) 9,443 S 557 7,030 1,710 173 355 94 (17) 9,345 205 Net earnings CITY COMPUTERS Balance Sheet (partial) Dollars in thousands) Fiscal Year Ended January 31, 2017 January 31, 2016 Assets Current assets: Cash Accounts and other receivables Inventory Prepaid expenses and other current assets Total current assets S 690 130 1,990 40 $2,850 $185 208 1,800 80 $2,273