HHO2e Cases - Chp 01

HHO2e Cases - Chp 01 - √ Decision Cases(15-20 min...

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Unformatted text preview: √ Decision Cases (15-20 min.) Decision Case 1 Larger amount denoted by check mark ( √ ) Req. 1 Sherman Moore Total assets…… $12,000 $13,000 √ ($7000 + $6,000) Req. 2 Total liabilities… $ 4,000 ($12,000 – $8,000) $ 7,000 √ Req. 3 Owner equity…. $ 8,000 √ $ 6,000 Req. 4 Total revenue…. $35,000 $53,000 √ ($44,000 + $9,000) Req. 5 Net income…….. $13,000 √ ($35,000 – $22,000) $9,000 (continued) Decision Case 1 Req. 6 There’s no single correct answer to this question. Possible answers include the following: a. Which business is more profitable? A business must be profitable to survive. b. Which business owes more to creditors? Big debts make a business risky. c. Which business has more owner equity? More owner equity makes a business less risky. Req. 7 Sherman Lawn Service looks better financially because: a. Sherman earned more net income on less total revenue. b. Sherman owes less and has more owner equity. Sherman has less risk. (20-30 min.) Decision Case 2 Req. 1 The banker would not congratulate the Guerreras for their net income because they have not measured net income properly. In fact, they have no net income at all. Their accounting errors include the following: 1. The amount of cash in the bank does not measure net income. The cash balance only shows how much cash is available for use in the business. 2. Neither an investment by an owner nor a bank loan creates a revenue. A business earns revenue by providing goods or services to customers. The Tres Amigos B & B hasn’t even opened, so there is no revenue yet. And a bank loan increases liabilities, not revenue. 3. None of the items they list as expenses is really an expense. The house and its renovation, furniture, kitchen equipment, and computer are all assets because these items provide future benefit to the business. Expenses result from using assets or creating liabilities in order to earn revenue. The Tres Amigos B & B hasn’t had any expenses yet. 4. The business will earn service revenue after it opens—from renting rooms. Expenses will result from using up assets and creating liabilities in the process of earning the revenue. (continued) Decision Case 2 Req. 2 Tres Amigos Bed & Breakfast Balance Sheet June 30, 2007 ASSETS LIABILITIES Cash $ 38,000 Bank loan payable $100,000 Computer 2,000 Kitchen equipment 10,000 STOCKHOLDERS’ EQUITY Furniture 20,000 Common stock 100,000 Building ($80,000 + $50,000) 130,000 Total liabilities and Total assets $200,000 stockholders’ equity $200,000 √ Ethical Issues Ethical Issue 1 Req. 1 The fundamental ethical issue in this situation is letting the financial statements tell the truth about the company’s performance. Performance...
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This note was uploaded on 10/27/2010 for the course ACCT 252 taught by Professor Mills during the Spring '08 term at NMSU.

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HHO2e Cases - Chp 01 - √ Decision Cases(15-20 min...

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