Case 1

ADW 610

CASE 1 (p. 50, HHO)

1. Which business has more assets?

Assets (A) = Liabilities (L) + Stockholders’ Equity (E)

Sherman Lawn Service’s Assets = $12000

Greg’s Groovy Tunes’ Assets (A)

= $7000 + $6000

= $13000

Therefore, Greg’s Groovy Tunes has more assets.

2. Which business owes more to creditors?

Sherman Lawn Service’s Liabilities (L)

= A – E

= $12000 - $8000

= $4000

Greg’s Groovy Tunes’ Liabilities = $7000

Therefore, Greg’s Groovy Tunes owes more to creditors.

3. In which business has the owner invested more?

Sherman Lawn Service has the owner invested more because the equity is $8000, while Greg’s Groovy Tunes’ Equity only $6000

4. Which business brought in more revenue?

Revenue (R) – Expenses (E) = Net Income (п)

Sherman Lawn Service’s revenue (R) = $35000

Greg’s Groovy Tunes’ revenue (R)

= Net Income + Expenses

= $9000 + $44000

= $53000

Therefore, Greg’s Groovy Tunes brought in more revenue.

5. Which business is more profitable?

Sherman Lawn Service’s Profit

= R – E

= $35000 - $22000

= $13000

Greg’s Groovy Tunes’ Profit = $9000

Therefore, Sherman Lawn Service is more profitable.

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

“Which business is more profitable?”

Profitability is the most important for evaluating there two businesses. Greg’s Groovy Tunes has the higher revenue compared to Sherman Lawn Service, but the total expenses is higher too that make the net income (profit) lower.

Also, although Greg’s Groovy Tunes’ assets are higher than Sherman Lawn service’s but Greg’s Groovy Tunes’ liabilities is higher too which mean this business owes more to creditors.

7. Which business looks better from a financial standpoint?

From a financial standpoint, Sherman Lawn Service looks better. This is because Sherman Lawn Service has higher profit and stockholder’s...