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Horngren'S Financial And Managerial Accounting
Found in: Page 53

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Short Answer

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?

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

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Step by Step Solution

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.

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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