Accounting (Page 47) Case 2 1. The income statement that is presented by Dave and Reba Guerrera is in fact not valid. They are prior to the grand opening, meaning that they have not been operating yet. In other words, they have recorded their preparation in the wrong type of financial statement. It is also wrong since they haven’t started running the business yet. No expenditure or revenue has incurred, which is why they cannot obtain a retained profit as well. In accounting, you do not count every item that will be bought as expenditure. Expenditure includes the cost of: rent, salary for employees, utilities, advertising, interest, supplies, insurance and property tax. So the purchase of the building, the equipment and all the other items cannot be classified as one of the expenses mentioned. However, they are all included to the assets of the firm and should therefore be recorded in the Balance Sheet. Another mistake is of course that they cannot make the same entry of the expense that equals to the assets. It would mess up the net income and leads to an inaccurate balance.
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