Case 1 - Sherman Lawn Service and Greg's Groovy Tunes ended the first year of operations, and both owners - Hannah Sherman and Greg Moore - want to know how well they came out at the end of the year. Neither business kept complete accounting records (even though Greg Moore majored in accounting). Sherman and Moore throw together the following data at year end:
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Sherman Lawn Service:
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Total Assets
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$12,000
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Equity
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8000
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Total Revenues
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35000
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Total Expenses
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22000
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Greg's Groovy Tunes:
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Total Liabilities
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$7,000
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Equity
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6000
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Total Expenses
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44000
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Net Income
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9000
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Working in the lawn-service business, Moore has forgotten all the accounting he learned in college. Sherman majored in environmental science, so she never learned any accounting. To gain information for evaluating their businesses, they ask you several questions. For each answer you must show your work to convince Sherman and Moore that you know what you are talking about.
1. Which business has more assets?
2. Which business owes more to creditors?
3. In which business has the owner invested more?
4. Which business brought in more revenue?
5. Which business is more profitable?
6. Which of the foregoing questions do you think is most important for evaluating these two businesses? Why?
7. Which business looks better from a financial standpoint?