# Dave and reba save all their married life to open a bed and breakfast

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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.