Let’s examine a case using Greg’s Tunes and another company, Sal’s Silly Songs. It is now the end of the first year of operations, and both owners—Sally Siegman and Greg Moore—want to know how well they came out at the end of the year. Neither business kept complete accounting records and neither business paid out dividends. Moore and Siegman throw together the following data at year end:
Sal’s Silly Songs:
Total assets............ $23,000
Common stock.......... 8,000
Total revenues.......... 35,000
Total expenses............ 22,000
Greg’s Tunes:
Total liabilities........... $10,000
Common stock........... 6,000
Total expenses........... 44,000
Net income........... 9,000
Working in the music business, Moore has forgotten all the accounting he learned in college. Siegman majored in English literature, 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 Moore and Siegman that you know what you are talking about.
1. Which business has more assets?
2. Which business owes more to creditors?
3. Which business has more stockholders’ equity at the end of the year?
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? (Challenge)
7. Which business looks better from a financial standpoint? (Challenge)