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Chapter 1: 1DC_6 (page 53)

Let鈥檚 examine a case using Greg鈥檚 Tunes and Sal鈥檚 Silly Songs. It is now the end of the first year of operations, and the stockholders want to know how well each business came out at the end of the year. Neither business kept complete accounting records, and no dividends were paid. The businesses throw together the data shown on the next page at year-end: \( 23,000 8,000 35,000 22,000 \) 10,000 6,000 44,000 9,000 Total Assets Common Stock Total Revenues Total Expenses Greg鈥檚 Tunes: Sal鈥檚 Silly Songs: Total Liabilities Common Stock Total Expenses Net Income To gain information for evaluating the businesses, the stockholders ask you several questions. For each answer, you must show your work to convince the stockholders that you know what you are talking about.

Requirements; 6. Which of the foregoing questions do you think is most important for evaluating these two businesses? Why?

Short Answer

Expert verified

More profitable and more creditors are the two most important factor for evaluating because these indicate the profitability and obligations of the company.

Step by step solution

01

Explanation on Total Liabilities and Net Income

Net income is the excess of the revenues over expenses of a company for a particular accounting period.

Total liabilities indicates the amount owed by the business to the lenders or creditors.

02

Explanation on comparison

The questions pertaining to the profitability and business obligations are important, as these will reflect whether the company is able to achieve higher profits with lower amount liabilities.

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Most popular questions from this chapter

Question:Blanchette Plant Service completed a special landscaping job for Kerry Company. Blanchette uses ABC and has the following predetermined overhead allocation rates:

Activity Predetermined

Allocation Base Overhead Allocation Rate

Designing Number of designs \( 290 per design

Planting Number of plants \) 20 per plant

The Kerry job included \(750 in plants; \)1,300 in direct labor; one design; and 30 plants.

Requirements

2. If Kerry paid $3,540 for the job, what is the operating income or loss?

During 2018, Flowing Rivers Spa reported revenue of \(30,000. Total expenses for the year were \)15,000. Flowing Rivers Spa ended the year with total assets of \(43,000, and it owed debts totaling \)14,000. At year-end 2017, the business reported total assets of \(28,000 and total liabilities of \)14,000. Requirements 1. Compute Flowing Rivers Spa鈥檚 net income for 2018. 2. Did Flowing Rivers Spa鈥檚 stockholders鈥� equity increase or decrease during 2018? By how much?

Amos Sharp recently opened his own accounting firm on October 1, which he operates as a corporation. The name of the new entity is Amos Sharp, CPA. Sharp experienced the following events during the organizing phase of the new business and its first month of operations in 2018. Oct. 5 Sharp deposited \(45,000 in a new business bank account titled Amos Sharp, CPA. The business issued common stock to Sharp. 6 Paid \)300 cash for letterhead stationery for new office. 7 Purchased office furniture for the office on account, \(6,500. 10 Consulted with tax client and received \)3,300 for services rendered. 11 Paid utilities, \(340. 12 Finished tax hearings on behalf of a client and submitted a bill for accounting services, \)16,000. 18 Paid office rent, \(1,800. 25 Received amount due from client that was billed on October 12. 27 Paid full amount of Accounts Payable created on October 7. 31 Cash dividends of \)3,800 were paid to stockholders. Requirements 1. Analyze the effects of the events on the accounting equation of Amos Sharp, CPA. Use a format similar to Exhibit 1-6. 2. Prepare the following financial statements: a. Income statement. b. Statement of retained earnings. c. Balance sheet.

Michael McNamee is the proprietor of a property management company,Apartment Exchange, near the campus of Pensacola State College. The business has cash of \(8,000 and furniture that cost \)9,000 and has a marketvalue of \(13,000. The business debts include accounts payable of \)6,000. Michael's personal home is valued at \(400,000, and his personal bank accounthas a balance of \)1,200. Consider the accounting principles and assumptionsdiscussed in the chapter, and identify the principle or assumption that best matches the situation:

a. Michael's personal assets are not recorded on the Apartment Exchange's

balance sheet.

b. The Apartment Exchange records furniture at its cost of \(9,000, not its market

value of \)13,000.

c. The Apartment Exchange reports its financial statements in U.S. dollars.

d. Michael expects the Apartment Exchange to remain in operation for the

foreseeable future

List the four financial statements. Briefly describe each statement.
See all solutions

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