Question

QUESTION 5 (25 minutes, 21 marks) On October 1, Erik Karlson opened a restaurant named Ek's Eatery Lid. After the first mon of operations, Karison is at a crossroads. The October financial statements paint a glowing picture of the business, and Karison has asked you whether he should expand Enk's Eatery To expand the business, Ek Karison wants to be earning net income of $10,000 per month and have total assets of $35.000. Based on the financial information available to her, Karlson believes he is meeting both goals To start the business, she invested $20,000, not the $10,000 amount reported as "Share capital on the balance sheet. The bookkeeper plugged the $10,000 "Share capital amount to the balance sheet to make it come out even. The bookkeeper made other mistakes too Ek shows you the following financial statements that the bookkeeper prepared Erik's Eatery Income Statement For Month Ended October 31, 2017 Revenues: Investments by owner Uneamed banquet sales revenue 20,000 3,000 23,000 Expenses Wages expense Rent expense Dividends Depreciation expense - fixtures 5,000 4,000 3,000 1,000 13,000 10,000 Net Income Enk's Eatery Balance Sheet October 31, 2017 Liabilities Accounts Payable Sales Revenue Accumulated Depreciation - Fixtures Assets Cash Prepaid Rent Insurance expense Food inventory Cost of goods sold Fixtures (tables, chairs, etc.) Short-term Investments 5.000 32.000 6,000 1,000 1,000 3.000 14,000 19,000 4,000 48,000 1,000 38,000 Owner's Equity Share capital 10,000 48,000 Required: 1. Calculate the corrected amount of net income (loss) for the period ended October 31.

Answer 1

Requirement (1)
Erik's Eatery
Income Statement
For the month ended October 31, 2017
Revenue	Amount ($)
Net Sales Revenue	32,000
Total Revenues	32,000
Expenses
Cost of goods sold	14,000
Insurance expense	1,000
Wage expense	5,000
Rent expense	4,000
Depreciation expense - Fixtures	1,000
Total Expenses	25,000
Net Income Before Taxes	7,000
Income tax expense	-
Income from Operations carried to retained earnings	7,000
Requirement (2)
Erik's Eatery
Retained Earnings Statement
For the month ended October 31, 2017
Particulars	Amount ($)
Balance in Retained Earnings as on October 1, 2017	0
Add: Income from Operations carried from Income Statement	7,000
	7,000
Less: Dividend	3000
Balance in Retained Earnings as on October 31, 2017	4,000
Requirement (3)
Erik's Eatery
Balance Sheet
For the month ended October 31, 2017
Assets	Amount ($)
Current Assets
Cash	6,000
Food Inventory	3,000
Prepaid expenses - Rent	1,000
Short-term investments	4,000
Total current assets	$                  14,000
Fixed (Long-Term) Assets
Fixtures	19,000
(Less accumulated depreciation)	(1,000)
Total fixed assets	$                  18,000
Total Assets	$           32,000
Liabilities and Owner's Equity
Current Liabilities
Accounts payable	5,000
Unearned banquet sales revenue	3,000
Total current liabilities	$                    8,000
Long-Term Liabilities
Other
Total long-term liabilities	$                             -
Owner's Equity
Owner's investment	20,000
Retained earnings	4,000
Total owner's equity	$                  24,000
Total Liabilities and Owner's Equity	$           32,000

Requirement (3)
Current Ratio = Current Asset / Current Liability

Current Asset = 14000
Current Liability = 8000
Therefore, Current Ratio = 14000 / 8000 = 1.75

Requirement (4)
Recommendation: Erik Karlson should not expand his eatery.
Explanation: In order to expand the business, Karlson wants to be earning net income of $10,000 per month and also have total assets of $35,000.
However, as it is clear from the above computation that his current net earnings per month are only $7,000 and his total Assets are only $32,000, Karlsons' targets are not met. Therefore, expansion is not advised.