Problem:
Ming Fu opened a Chinese restaurant in Toledo, OH. Business has been good, and Ming Fu is considering doubling the size of the restaurant. A cousin, Lei Ma, has been doing the accounting for the restaurant, and Lei Ma has produced the following financial statements at Dec 31, 2005, end of the first year of operations:
Ming Fu foods income statement:
Sales revenue $50,000
Common stock 38,000
Total revenue 88,000
Accounts payable 8,000
Advertising expense 5,000
Rent expense 6,000
Total expenses 19,000
Net income 69,000
Ming Fu foods balance sheet
Assets
Cash $14,000
Cost of goods sold (expense) 19,000
Food inventory 5,000
Furniture 47,000
Total assets 85,000
Liabilities
None
Owner's equity 85,000
In these financial statements all amounts are correct, except for Owners' Equity. Lei Ma heard that total assets should have equal liabilities plus owners' equity, so he plugged the amount of owners' equity at $85,000 to make balance sheet come out even.
Required:
Ming Fu has asked whether she should double the size of the restaurant. Her banker tells her to expand if (a) net income for the year reached $50,000 and (b) total assets are at least 75,000. It appears that the business has reached these milestones, but Ming Fu has a nagging doubt about Lei Ma's understanding for accounting. She needs your help in making this decision. Prepare a corrected income statement and balance sheet. (Remember that retained earnings, which Lei Ma omitted, should equal net income for the first year; there were no dividends). After preparing the statements, give Ming Fu your recommendation.