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1. Your brother has taken your advice about how to organize his business. Next, he asks you to help him fund his business plans. He needs about $30,000 for buying inventory. He is confident that he would be able to return this money to the bank within the next year.
• Which source of financing would be most suitable for this situation?
• Why?
2. Write and explain the basic accounting equation for the following business transactions.
• A business bought new equipment for $5,000. Half of the money was paid using a bank loan; the other half was paid by the owner.
• A business received $15,000 in cash from its owner.
3. Your brother started his business about 3 weeks ago. You have visited him at his business location a few times and have noticed that he is totally focused on sales and keeping his customers happy. You notice that he is not keeping a record of the daily financial transactions. His excuse is that his business is very small, therefore, financial statements are not needed. Explain the significance of financial statements to him.
4. At the end of last year, your brother approaches you with his business’ financial statements. The statements (Balance Sheet and Income Statement) have been provided attached below.
• Perform a basic ratio analysis by calculating one ratio in each of the three categories below:
• Liquidity Ratio
• Profitability Ratio
• Leverage Ratio
• For your brother’s benefit, define and explain the significance of each of the ratios that your calculate.
Criteria
Question 1a- A legitimate source of financing is named.
Question 1b- Rationale for the source of financing is logical, based on a strong understanding of that source of financing , and well-explained.
Question 2- equation
Question 2a- Basic accounting equation is exemplary.
Question 2b- Basic accounting equation is exemplary.
Question 2- equation explanation
Question 2a- Thorough explanation of what the basic accounting equation communicates for this question, including all information and presenting no misinformation.
Question 2b- Thorough explanation of what the basic accounting equation communicates for this question, including all information and presenting no misinformation.
Question 3- Thorough explanation of the significance of financial statements, based upon complete and correct information.
Question 4a- Liquidity ratio calculation complete and correct
Profitability ratio calculation complete and correct
Leverage ratio calculation complete and correct
Question 4b- All three ratios were explained correctly.
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