CASE 14–1 Quick Lunch1

In mid-2002, Mr. and Mrs. Richard Bingham decided to go into the restaurant business. Mr. Bingham
was dissatisfied with his job as short-order cook in a small family-owned restaurant where he earned
$9.75 an hour. During July 2002, the Binghams found a business that seemed to be what they
wanted. This was the Quick Lunch, a lunch counter located in Fisher’s Department Store downtown.
The Quick Lunch was operated under a lease with the department store; only the equipment was
actually the property of the operator of the lunchroom. The equipment was old, but Mr. Bingham
thought that it was in fairly good condition.

The couple opened negotiations with the current lunchroom operator and quickly reached an
agreement to take over the lease and equipment on September 1, and to pay the operator a price of
$10,300. Of this price, Mr. Bingham estimated that $4,600 represented the fair value of the
equipment. The lease expired on August 31, 2003, and was renewable for three years if Fisher’s
consented. Under the terms of the lease, Fisher’s furnished space, heat, light, and water, and the
operators (i.e., the Binghams) paid Fisher’s 15 percent of gross receipts as rent.

The Binghams paid the $10,300 from their personal savings account and also transferred $5,150 to a
checking account that they opened in the name of Quick Lunch.

Shortly after they started operations, the cooking range broke down. The Binghams thereupon sold
the range for $400 (which was approximately its estimated value as a part of the $4,600) and
purchased a new range for $4,000. It was installed immediately, and they paid $600 for its
installation.

The coffee urn also broke down, but Mr. Bingham was able to repair it himself by working 16 hours
one Sunday.

Early in 2003, the Binghams called in a firm that specialized in making out reports for small
businesses and requested financial statements for Quick Lunch for the period ended December 31,
2002. From their cash register and checkbook, they had the following figures:

Cash receipts:
Cash receipts from customers $33,165
Sale of cooking range 400
Total cash receipts $33,565
Cash disbursements:
Food and supplies $14,275
City restaurant license, valid September 1, 2002 to August 31, 2003 225
15% rent paid to Fisher’s for September, October, and November 3,460
New cooking range 4,000
Installation of cooking range 600
Other operating expenses 90
Withdrawals for personal use 3,800
Total cash disbursements $26,450

1
*Copyright © by the President and Fellows of Harvard College. Harvard Business School case 196-061.
Before going home on December 31, the Binghams had estimated the value of food and supplies
then on hand to be about $750 at cost. Early in January, they paid two bills, the December meat bill
of $890 and the December rent of $1,515.

The Binghams also explained to the accountant that the cash receipts of $33,165 included $3,850
received from the sale of 140 “coupon books” at $27.50 each. Each book contained coupons with a
face value of $30, which could be used to pay for meals. As of December 31, coupons with a face
value of $2,700 had been used to pay for meals; therefore, coupons with a face value of $1,500 were
still outstanding.

Questions
1. Prepare a balance sheet as of December 31, 2002, and an income statement and cash flow
statement for the four month period ending December 31, 2002. Explain briefly your
treatment of the coupon books and of anything else you believe needs comment.
2. Comment briefly on the significant information revealed by your financial statements.