Extra Critical Thinking Questions
Decision Case 1-2
Dave and Reba Guerrera saved all their married life to open a bed and breakfast (B&B) named
Tres Amigos. They invested $100,000 of their own money. The business then got a $100,000
bank loan for the $200,000 needed to get started. The company bought a rundown old Spanish
colonial home in Tucson for $80,000. It cost another $50,000 to renovate. They found most of
the furniture at antique shops and flea markets—for a total cost of $20,000. Kitchen equipment
cost $10,000, and a computer system cost $2,000.
Prior to the grand opening, the banker requests a report on their activities thus far. The bank
statement of Tres Amigos shows a cash balance of $38,000. Dave and Reba believe that the
$38,000 represents net income for the period, and they feel pretty good about the results of their
business. To better understand how well they are doing, they prepare the following income
statement for presentation to the bank:

Requirements
1. Suppose you are the Guerreras’ 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? Does the amount of cash in the bank
measure net income? Explain.

2. Prepare the balance sheet for Tres Amigos based on these data. There is no net income or loss
yet.