Decision Case
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. The business then got a $100,000 bank loan for the $200,000 needed to get started. The company bought a rundown 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-for a total cost of $20,000. Kitchen equipment cost $10,000, and a computer system cost $2,000.
Prior to the grand opening, the banker requests a report on their activities thus far. The bank statement of Tres Amigos shows a cash balance of $38,000. Dave and Reba believe that the $38,000 represents net income for the period, and they feel pretty good about the results of their business. To better understand how well they are doing, they prepare the following income statement for presentation to the bank:
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TRES AMIGOS BED AND BREAKFAST
Income Statement
Six Months Ended June 30, 2015
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Revenues:
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Common stock
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$ 100,000
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Bank loan
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100,000
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Total revenues
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$ 200,000
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Expenses:
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Cost of the house
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80,000
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Renovation to the house
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50,000
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Furniture expense
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20,000
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Kitchen equipment expense
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10,000
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Computer expense
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2,000
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Total expenses
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162,000
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Net income
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$ 38,000
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Requirements
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.
2. Prepare the balance sheet for Tres Amigos based on these data. There is no net income or loss yet.