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 both owners want to know how well each business came out at the end of the year. Neither business kept complete accounting records, and neither owner made any withdrawals. The businesses throw together the following data at year-end:
To gain information for evaluating the businesses, the owners ask you several questions. For each answer, you must show your work to convince the owners that you know what you are talking about.
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1. Which business has more assets?
2. Which business owes more to creditors?
3. Which business has more owner’s 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?
7. Which business looks better from a financial standpoint?