David and Rita Richardson saved all their married life to open a homestay named T-Lights. They invested RM100,000 of their own money and the corporation issued common stock to them. The business then got a RM100,000 bank loan for the RM200,000 needed to get started. The corporation bought a run-down old colonial home in Ipoh for RM80,000. It cost another RM50,000 to renovate. They found most of the furniture at antique shops and flea markets – total cost was RM20,000. Kitchen equipment cost RM10,000, and a Dell computer set cost RM2,000. Prior to the grand opening, the banker requests a report on their activities thus far. T-Lights’ bank statement shows a cash balance of RM38,000. They feel pretty good with that much net income in only six months. To better understand how well they are doing, they prepare the following statement for presentation to the bank: T-Lights Income Statement Six Months Ended 30 June 2020 Revenues: Investment by owner Bank loan RM100,000 100,000 Total revenues 200,000 Expenses: Cost of the house Repairs to the house Furniture expense Kitchen equipment expense Computer expense RM 80,000 50,000 20,000 10,000 2,000 Total expenses 162,000 Net income 38,000 Requirements: 1(a). Suppose you are the Richardson’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? 1(b). Does the amount of cash in the bank measure net income? Explain
David and Rita Richardson saved all their married life to open a homestay named T-Lights. They invested RM100,000 of their own money and the corporation issued common stock to them. The business then got a RM100,000 bank loan for the RM200,000 needed to get started. The corporation bought a run-down old colonial home in Ipoh for RM80,000. It cost another RM50,000 to renovate. They found most of the furniture at antique shops and flea markets – total cost was RM20,000. Kitchen equipment cost RM10,000, and a Dell computer set cost RM2,000.
Prior to the grand opening, the banker requests a report on their activities thus far. T-Lights’ bank statement shows a cash balance of RM38,000. They feel pretty good with that much net income in only six months. To better understand how well they are doing, they prepare the following statement for presentation to the bank:
T-Lights
Income Statement
Six Months Ended 30 June 2020
|
Revenues: Investment by owner Bank loan |
RM100,000 100,000 |
|
Total revenues |
200,000 |
|
Expenses: Cost of the house Repairs to the house Furniture expense Kitchen equipment expense Computer expense |
RM 80,000 50,000 20,000 10,000 2,000 |
|
Total expenses |
162,000 |
|
Net income |
38,000 |
Requirements:
1(a). Suppose you are the Richardson’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?
1(b). Does the amount of cash in the bank measure net income? Explain
Step by step
Solved in 2 steps
