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MCS,PHD
Argosy University/ Phoniex University/
Nov-2005 - Oct-2011
Professor
Phoniex University
Oct-2001 - Nov-2016
(Learning Objective 2: Correcting financial statements; deciding whether toexpand a business) Sophia Loren opened an Italian restaurant. Business has been good, and Loren is considering expanding the restaurant. Loren, who knows little accounting, produced the following financial statements for Little Italy, Inc., at December 31, 20X1, end of the first month of operations:
Little Italy, Inc. Income Statement Month Ended December 31, 20X1 |
 |
Sales revenue |
$36,000 |
Common stock |
10,000 |
Total revenue |
46,000 |
Accounts payable |
$ 8,000 |
Advertising expense |
5,000 |
Rent expense |
6,000 |
Total expenses |
19,000 |
Net income |
$27,000 |
Little Italy, Inc. Balance Sheet December 31, 20X1 |
 |
Assets |
 |
Cash |
$ 6,000 |
Cost of goods sold (expense) |
22,000 |
Food inventory |
5,000 |
Furniture |
10,000 |
Total Assets |
43,000 |
Liabilities |
 |
None |
 |
Owners’ Equity |
$43,000 |
In these financial statements all amounts are correct, except for Owners’ Equity. Loren heard that total assets should equal total liabilities plus owners’ equity, so she plugged in the amount of owners’ equity at $43,000 to make the balance sheet come out even.
Required
Sophia Loren has asked whether she should expand the restaurant. Her banker says Loren may be wise to expand if (a) net income for the first month reached $5,000 and (b) total assets are at least $25,000. It appears that the business has reached these milestones, but Loren doubts whether her financial statements tell the true story. She needs your help in making this decision. Prepare a corrected income statement and balance sheet. (Remember that Retained Earnings, which was omitted from the balance sheet, should equal net income for the first month; there were no dividends.) After preparing the statements, give Sophia Loren your recommendation as to whether she should expand the restaurant.
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