Suppose you are the manager of Greg’s Tunes. The company needs a bank loan in order to purchase music equipment. In evaluating the loan request, the banker asks about the assets and liabilities of the business. In particular, the banker wants to know the amount of the business’s owner’s equity. Requirements: (1) Is the banker considered an internal or external user of financial information? (2) Which financial statement would provide the best information to answer the banker’s questions? (3) If the assets are qual to $5,000 and if the liabilities are $2,000, calculate the Owner’s Equity?
Answers
Answer:
Step 6 of 11
3. Computation to find who has greater owner’s equity
In order to find Song’s owner’s equity, Song’s net income needs to be computed first
Computation to find net income
Song’s has a total of owner’s equity of $21,000
Step 7 of 11
Computation to find Tunes’ owner’s equity:
Tune’s owner’s equity is $15,000 is less than Song’s owner’s equity of $21,000. Song has greater owner’s equity.
Step 8 of 11
4. Computation to find which company has greater revenue
Computation to find Tune’s revenue:
Song’s total revenue is $35,000. Tune’s revenue is greater since it has total revenue of $53,000.
Step 9 of 11
5. To find which company is more profitable
Song’s net income needs to be calculated:
Tune’s net income is $9,000 while Song’s net income is $13,000. Song has a higher net income which means it is the more profitable company.
Step 10 of 11
6.
Which company is more profitable is the most important question. Profitability can be determined by net income. If revenues exceed expenses there is a net income. However if expenses exceed revenue the company has a net loss which means the company is losing money.
Profitability is important because that determines if the company is making any money or losing money. Profitability allows the company to pay creditors, purchase more assets and pay expenses without taking out more loans or have the owner invest his or her own money to keep the business going.
Step 11 of 11
7. Analyze financial data
Sal’s Silly Songs looks better from a business standpoint. Song’s financial data looks better than Tunes because it has a higher net income and lower liabilities.
A higher net income is promising. This means Songs was able to make a higher profit for the first year.
Song’s also has lower liabilities. This means Song is less in debt and owes less money to its creditors. Song can keep most of its profits to use for other resources instead of using its profits to pay off loans.
Step-by-step explanation:
Step 6 of 11
3. Computation to find who has greater owner’s equity
In order to find Song’s owner’s equity, Song’s net income needs to be computed first
Computation to find net income
Song’s has a total of owner’s equity of $21,000
Step 7 of 11
Computation to find Tunes’ owner’s equity:
Tune’s owner’s equity is $15,000 is less than Song’s owner’s equity of $21,000. Song has greater owner’s equity.
Step 8 of 11
4. Computation to find which company has greater revenue
Computation to find Tune’s revenue:
Song’s total revenue is $35,000. Tune’s revenue is greater since it has total revenue of $53,000.
Step 9 of 11
5. To find which company is more profitable
Song’s net income needs to be calculated:
Tune’s net income is $9,000 while Song’s net income is $13,000. Song has a higher net income which means it is the more profitable company.
Step 10 of 11
6.
Which company is more profitable is the most important question. Profitability can be determined by net income. If revenues exceed expenses there is a net income. However if expenses exceed revenue the company has a net loss which means the company is losing money.
Profitability is important because that determines if the company is making any money or losing money. Profitability allows the company to pay creditors, purchase more assets and pay expenses without taking out more loans or have the owner invest his or her own money to keep the business going.
Step 11 of 11
7. Analyze financial data
Sal’s Silly Songs looks better from a business standpoint. Song’s financial data looks better than Tunes because it has a higher net income and lower liabilities.
A higher net income is promising. This means Songs was able to make a higher profit for the first year.
Song’s also has lower liabilities. This means Song is less in debt and owes less money to its creditors. Song can keep most of its profits to use for other resources instead of using its profits to pay off loans.