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Chapter 1: 1DC_6 (page 53)

Let’s examine a case using Greg’s Tunes and Sal’s 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’s Tunes: Sal’s 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

Prepare the balance sheet for Damon Design Studio as of December 31, 2018

Tiny Town Kennel earns service revenue by caring for the pets of customers. Tiny

Town Kennel is organized as a corporation. During the past month, Tiny Town

Kennel has the following transactions:

a. Received \(520 cash for service revenue earned.

b. Paid \)325 cash for salaries expense.

c. Received a \(1,000 contribution in exchange for common stock.

d. Earned \)640 for service revenue, but the customer has not paid Tiny Town

Kennel yet.

e. Received utility bill of \(85, which will be paid next month.

f. Cash dividends of \)100 were paid to stockholders.

Indicate the effects of the business transactions on the accounting equation for Tiny

Town Kennel. Transaction (a) is answered as a guide.

Increase asset (Cash); Increase equity (Service Revenue)

Elaine’s Inflatables earns service revenue by providing party planning services and inflatable playscapes. Elaine’s Inflatables is organized as a corporation. During the past month, Elaine’s Inflatables had the following transactions:

a. Received contributions of \(10,000 in exchange for common stock.

b. Purchased equipment for \)5,000 on account

c. Paid \(400 for office supplies.

d. Earned and received \)2,500 cash for service revenue.

e. Paid \(400 for wages to employees.

f. Cash dividends of \)1,000 were paid to stockholders.

g. Earned \(1,000 for services provided. Customer has not yet paid.

h. Paid \)1,000 for rent.

i. Received a bill for $250 for the monthly utilities. The bill has not yet been paid.

Indicate the effects of the business transactions on the accounting equation for

Elaine’s Inflatables. Transaction (a) is answered as a guide.

a. Increase asset (Cash); Increase equity (Common Stock)

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?

Consider the following accounting terms and definitions, and match each term to the definition:

1. Accounting equation

2. Asset

3. Balance sheet

4. Expense

5. Income statement

6. Liability

7. Net income

8. Net loss

9. Revenue

10. Statement of cash flows

11. Statement of retained

earnings

a. An economic resource that is expected to be of benefit

in the future

b. Debts that are owed to creditors

c. Excess of total expenses over total revenues

d. Excess of total revenues over total expenses

e. The basic tool of accounting, stated as

Assets = Liabilities + Equity

f. Decreases in equity that occur in the course of selling

goods or services

g. Increases in equity that occur in the course of selling

goods or services

h. Reports on a business’s cash receipts and cash payments

during a period

i. Reports on an entity’s assets, liabilities, and stockholders’

equity as of a specific date

j. Reports on an entity’s revenues, expenses, and net

income or loss for the period

k. Reports how the company’s retained earnings balance

changed from the beginning to the end of the period
See all solutions

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