During the summer between his junior and senior years, James Cook needed to earn sufficient money for the coming academic year. Unable to obtain a job with a reasonable salary, he decided to try the lawn care business for three months. After a survey of the market potential, James bought a used pickup truck on June 1 for $1,800. On each door he painted "James Cook Lawn Service, Phone 471-4487." He also spent $900 for mowers, trimmers, and tools. To acquire these items, he borrowed $3,000 cash by signing a note payable promising to pay the $3,000 plus interest of $78 at the end of the three months (ending August 31).

At the end of the summer, James realized that he had done a lot of work, and his bank account looked good. This fact prompted him to become concerned about how much profit the business had earned.

A review of the check stubs showed the following: Bank deposits of collections from customers totaled $15,000. The following checks had been written: gas, oil, and lubrication, $1,050; pickup repairs, $250; mower repair, $110; miscellaneous supplies used, $80; helpers, $5,400; payroll taxes, $190; payment for assistance in preparing payroll tax forms, $25; insurance, $125; telephone, $110; and $3,078 to pay off the note including interest (on August 31). A notebook kept in the pickup, plus some unpaid bills, reflected that customers still owed him $700 for lawn services rendered and that he owed $180 for gas and oil (credit card charges). He estimated that the cost for use of the truck and the other equipment (called depreciation ) for three months amounted to $600.