Financial & Managerial Accounting 3rd Edition by Charles Horngren,Harrison, Walter,Suzanne Oliver

Exercise 54

Dave and Reba Guerrera saved all their married life to open a bed and breakfast (B B) named Tres Amigos. They invested $100,000 of their own money and the corporation issued common stock to them. The business then got a $100,000 bank loan for the $200,000 needed to get started. The corporation bought a run-down old Spanish colonial home in Tucson for $80,000. It cost another $50,000 to renovate. They found most of the furniture at antique shops and flea markets-total cost was $20,000. Kitchen equipment cost $10,000, and a Dell computer set cost $2,000.
Prior to the grand opening, the banker requests a report on their activities thus far. Tres Amigos' bank statement shows a cash balance of $38,000. Dave and Reba believe that the $38,000 represents net income for the period, and they feel pretty good about the results of their business. To better understand how well they are doing, they prepare the following income statement for presentation to the bank:

1. Suppose you are the Guerreras' banker, and they have given you this income statement. Would you congratulate them on their net income If so, explain why. If not, how would you advise them to measure the net income of the business Does the amount of cash in the bank measure net income Explain. (Challenge)
2. Prepare Tres Amigos' balance sheet from their data. There are no retained earnings yet.