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, 2011, end of the first month of operations:

In these financial statements all amounts are correct, except for Owners Equity. Loren heard that total assets should equal total liabilities plus owner€™s equity, so she plugged in the amount of owners equity at $49,000 to make the balance sheet come out even.

Requirement
1. 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 $10,000
(b) Total assets are at least $35,000.
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 therestaurant.

Transcribed Image Text:

Little Italy, Inc. Income Statement Little Italy, Inc. Balance Sheet December 31, 2011 Month Ended December 31, 2011 Sales revenue. Common stock $42,000 10,000 52,000 Assets $12,000 22,000 Food inventory.5,000 10,000 $49,000 Cas Total revenue Cost of goods sold (expense) Accounts payable Advertising ex Rent expense.. $ 8,000 5,000 6,000 19,000 $33,000 Furniture Total Assets Liabilities Total expenses... Net i None Owners' Equity $49,000