1hour

Apply Your Knowledge

--------~--~---------------. Case 1. This case follows up on the chapter-opening story about Sherman Lawn Service and Greg's Groovy Tunes. It is now the end of the first year of operations, and both owners- Hannah Sherman and Greg Moore-s-want to know how well thcv came out at the end of the year. Neither business kept-complete accounting records (even tho'ugh Greg Moore majored in accounting). Sherman and Moore throw together the following data at year end:

Sherman Lawn Service:

Total assets

Equity

Total revenues

Total expenses

Greg's Groovy Tunes:

Total liabilities

s12,O()O S,UUU

35,000

22,000

Equity

Total cxpens,'s

Net income

$ 7,000

6,000 44,()OO

9,000

\X1orking in the lawn-service business, Moore has forgotten all the accounting he learned in college. Shennan 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 Tv-loon: that yuu know what you are talking about. 1. \Xlhich business has more assets? 2. Which business owes 1110rt' to creditors? 3. In which business has the owner invested more? 4. \Xlhich business brought in more revenue? 5. \Vhich business is more profitable? 6. Which of the foregoing questions do you think is most important for evaluating these two

businesses? Why? (Challenge) 7. \Xihich business looks better from a financial standpoint? (Challenge)

Case 2. Dave and Reba Guerrera saved all their married life to open a bed and breakfast (B&B) named Tres Arnigos. Dave invested $100,000 of their own money and the company gave capital to Dave. The business then got a $lUO,OOO bank loan tor the $200,000 needed to get started. The company bought a run-down old Spanish colonial home in Tucson for $HO,OOO. It cost another $5(),OOO to renovate. Dave and Reba found most of the furniture at antique shops and ilea markets-total cost was $20,000. Kitchen equipment cost $10,000, and a Dell com- puter set cost $2,000.

Prior to the grand opening, the hanker requests a report on the business's activities thus far. Trcs Amigos' bank statement shows a cash balance of $38,000. Dave and Reba feci pretty good with that much net income in only six months. To better understand how we ll they arc doing, they prepare the following income statement for presentation to the hank:

SO Chapter 1