Dave and Reba save all their married life to open a bed and breakfast (B&B) named Tres Amigos. Dave invested $ 100,000 of their own money and the company gave capital to Dave. The business then got a $ 100,000 bank loan for the $ 200,000 needed to get started. The company bought a run-down old Spanish colonial home in Tucson for $ 80,000. It cost another $ 50,000 to renovate. Dave and Reba found most of the furniture at antique shops and flea markets- total cost was $ 20,000. Kitchen equipment cost $ 10,000 and Dell computer set cost $ 2,000.
Prior to the grand opening, the banker requests a report on the business activities thus far. Tres Amigo's bank statement shows cash balance of $ 38,000. Dave and Reba feel pretty good with that much net income in only six months. To better understand how well they doing, they prepare the following income statement for presentation to the bank.
TRES AMIGO BED AND BREAKFAST
Income statement
Six month ended June 30, 2010
Revenue
Investment by owner 100,000
Bank loan 100,000
Total revenue 200,000
Expenses
Cost of the house 80,000
Repairs to the house 50,000
Furniture expenses 20,000
Kitchen equipment expenses 10,000
Computer expenses 2,000
Total Expenses 162,000
Net income 38,000
1. Suppose you are the company's 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.
2. Prepare Tres Amigos balance sheet from its data.