Case 2. (Learning Objective 2: Correcting financial statements; deciding whether to expand a business) Gianna Loren opened an Italian restaurant. Business has been good, and Gianna is considering expanding the restaurant. Gianna, who knows little accounting, produced the following financial statements for Little Italy, Inc., at December 31, 20X7, the end of the first month of operations:

In these financial statements all amounts are correct, except for Owners’ Equity. Gianna heard that total assets should equal total liabilities plus owners’ equity, so she plugged in the amount of owners’ equity at $49,000 to make the Balance Sheet come out even.
Requirement 1. Gianna Loren has asked whether she should expand the restaurant. Her banker says she may be wise to expand if

(a) net income for the first month reached $10,000 and

(b) total assets are at least $35,000. It appears that the business has reached these milestones, but Gianna 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 Gianna Loren your recommendation as to whether she should expand the restaurant.

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A1 12 2 Sales revenue 3 Share capital 4 Total revenue 5 6 Accounts payable 7 Advertising expense 8 Rent expense 9 Total expenses 10 Net income 11 Little Italy, Inc. Income Statement Month Ended December 31, 20X7 $ 42,000 10,000 52,000 $ 8,000 5,000 6,000 19,000 $ 33,000 A1 Little Italy, Inc. Balance Sheet 12 December 31, 20X7 Total Assets 2 Assets Cash 3 456 7 Cost of goods sold (expense) Food Inventory Furniture 8 Liabilities $ 12,000 22,000 5,000 10,000 $ 49,000 9 None 10 Owners' Equity 11 $ 49,000