Case 1 – Sherman Lawn Service And Greg’s Groovy Tunes Ended

Case 1 – Sherman Lawn Service and Greg’s Groovy Tunes ended the first

Sherman Lawn Service and Greg’s Groovy Tunes concluded their first year of operations. Both owners, Hannah Sherman and Greg Moore, are interested in evaluating their business performances at year-end. Since neither business maintained complete accounting records, they provided the following financial data:

• Sherman Lawn Service:
  • Total Assets: $12,000
  • Equity: $8,000
  • Total Revenues: $35,000
  • Total Expenses: $22,000
• Greg's Groovy Tunes:
  • Total Liabilities: $7,000
  • Equity: $6,000
  • Total Expenses: $44,000
  • Net Income: $9,000

Greg Moore, working in the lawn-service business, has forgotten his college accounting knowledge, and Hannah Sherman, an environmental science major, has no accounting background. They seek your assistance with several questions to better understand their businesses' financial health. Your responses must include clear calculations and explanations to demonstrate your understanding and help Sherman and Moore interpret their financial positions.

Paper For Above instruction

To evaluate the financial standing of Sherman Lawn Service and Greg’s Groovy Tunes, we need to analyze several key financial metrics such as assets, liabilities, owner’s equity, revenues, and profitability. This comprehensive analysis helps both owners understand which aspects of their businesses are performing well and where improvements might be necessary.

1. Which business has more assets?

Assets represent the resources owned by a business that generate future economic benefits. According to the provided data, Sherman Lawn Service possesses total assets worth $12,000, whereas Greg’s Groovy Tunes does not explicitly state total assets, but we can deduce it. Since we know the liabilities and equity of Greg's Groovy Tunes, we can compute its total assets using the accounting equation:

Total Assets = Total Liabilities + Equity

For Greg’s Groovy Tunes:

Total Assets = $7,000 (Liabilities) + $6,000 (Equity) = $13,000

Comparing the two, Greg’s Groovy Tunes has total assets of $13,000, which surpasses Sherman Lawn Service’s $12,000. Therefore, Greg’s Groovy Tunes possesses more assets overall.

2. Which business owes more to creditors?

Liabilities reflect the amounts owed to creditors. Sherman Lawn Service does not specify liabilities, but typically, if liabilities are not provided, it is assumed that the business might have minimal or unreported liabilities. For Greg’s Groovy Tunes, liabilities are explicitly given as $7,000. Since the liabilities of Sherman Lawn Service are not provided, and the problem does not specify them, the safest conclusion is that Greg’s Groovy Tunes owes $7,000 to creditors, which is a concrete figure. Without explicit liability data for Sherman Lawn Service, we cannot definitively state whether it owes more or less, but generally, given its total assets and equity, it might have liabilities, possibly less than Greg's.

In assessment, Greg’s Groovy Tunes owes $7,000 to creditors; Sherman Lawn Service’s liabilities are unknown, but based on owner's equity and assets, they likely owe less than that. Thus, Greg’s Groovy Tunes owes more to creditors.

3. In which business has the owner invested more?

Owner’s investment, or equity, represents the owner’s stake in the business. Sherman’s business has equity of $8,000, while Greg’s business has equity of $6,000. Therefore, Sherman has invested more in her business than Greg.

4. Which business brought in more revenue?

The total revenue for Sherman Lawn Service is given as $35,000. For Greg's Groovy Tunes, total revenue isn’t specified directly, but net income and expenses are provided. Since net income equals revenue minus expenses, we can find Greg’s revenue by adding net income and expenses:

Gross Revenue = Net Income + Expenses = $9,000 + $44,000 = $53,000

Hence, Greg’s Groovy Tunes generated $53,000 in revenue, which exceeds Sherman Lawn Service’s $35,000. Therefore, Greg's business brought in more revenue.

5. Which business is more profitable?

Profitability can be assessed through net income relative to revenues or total expenses. Sherman’s net income cannot be directly calculated because total expenses and revenues are available, but net income can be computed as:

Net Income (Sherman) = Total Revenues - Total Expenses = $35,000 - $22,000 = $13,000

Greg’s net income is already provided as $9,000. Comparing net incomes, Sherman’s business is more profitable with $13,000 versus Greg’s $9,000.

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

Among all the questions, evaluating profitability—specifically net income relative to revenues—is most critical because it directly indicates how efficiently each business converts revenue into profit after covering expenses. Profitability determines sustainability and potential for growth. A business might have high assets but low profitability, signaling underperformance, whereas a consistently profitable business sustains operations and attracts investment. Therefore, understanding profit margins and net income provides a clearer picture of financial health than assets or liabilities alone.

7. Which business looks better from a financial standpoint?

Considering overall financial health, Sherman Lawn Service appears more favorable because it exhibits a higher net income ($13,000 versus $9,000), owns more equity, and has a better profitability margin. Additionally, Sherman’s assets, though slightly less in value than Greg’s, are accompanied by higher overall profitability and owner’s investment. Although Greg’s business holds more assets and revenue, its higher liabilities and lower profit margins suggest it might have more financial risk. Overall, Sherman Lawn Service shows a more resilient financial position, making it the better choice from a financial standpoint at this stage.

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