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    Financial Statements and Owner's Equity for Ming Fu

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    Ming Fu opened a Chinese restaurant in Toledo, OH. Business has been good, and Ming Fu is considering doubling the size of the restaurant. A cousin, Lei Ma, has been doing the accounting for the restaurant, and Lei Ma has produced the following financial statements at Dec 31, 2005, end of the first year of operations:

    Ming Fu foods income statement:

    Sales revenue $50,000
    Common stock 38,000
    Total revenue 88,000

    Accounts payable 8,000
    Advertising expense 5,000
    Rent expense 6,000
    Total expenses 19,000
    Net income 69,000

    Ming Fu foods balance sheet

    Assets
    Cash $14,000
    Cost of goods sold (expense) 19,000
    Food inventory 5,000
    Furniture 47,000
    Total assets 85,000

    Liabilities
    None

    Owner's equity 85,000

    In these financial statements all amounts are correct, except for Owners' Equity. Lei Ma heard that total assets should have equal liabilities plus owners' equity, so he plugged the amount of owners' equity at $85,000 to make balance sheet come out even.

    Required

    Ming Fu has asked whether she should double the size of the restaurant. Her banker tells her to expand if (a) net income for the year reached $50,000 and (b) total assets are at least 75,000. It appears that the business has reached these milestones, but Ming Fu has a nagging doubt about Lei Ma's understanding for accounting. She needs your help in making this decision. Prepare a corrected income statement and balance sheet. (Remember that retained earnings, which Lei Ma omitted, should equal net income for the first year; there were no dividends). After preparing the statements, give Ming Fu your recommendation.

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    Solution Preview

    Please see the attached file.

    Ming Fu opened a Chinese restaurant in Toledo, OH. Business has been good, and Ming Fu is considering doubling the size of the restaurant. A cousin, Lei Ma, has been doing the accounting for the restaurant, and Lei Ma has produced the following financial statements at Dec 31, 2005, end of the first year of operations:

    Ming Fu foods income statement:

    Sales revenue $50,000
    Common stock 38,000
    Total revenue 88,000

    Accounts payable 8,000
    Advertising expense 5,000
    Rent expense 6,000
    Total expenses 19,000 ...

    Solution Summary

    The expert examines financial statements and owner's equity for Ming Fu.

    $2.19

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