Chapter 1 Lead Question Discussion Post

In Chapter 1 you learned that the Accounting Equation for a Corporation is Assets = Liabilities + Owners Equity (Owners Equity = Common Stock + Retained Earnings). A Proprietorship has only one owner, and its Accounting Equation includes only a single category of Owners Equity called "Capital."

Capital for a Proprietorship:

• Investments by the owner increase Capital.
• Payments back to the Owner decrease Capital. They are called Withdrawals.
• Net Income increases Capital.
• Should there be a loss, Net Loss decreases Capital.

Consider the following Proprietorship. Tiffany Collins is the owner and operator of an interior decorating business called "Tiffanys." It is Tiffany's first year in business. Tiffany started her business with a personal cash investment of $20,000. Her business also borrowed $20,000 additional cash from the Bank. By the end of the first year cash was down to $7,000. Tiffany's only other assets were $18,000 of accounts receivables from customers and $50,000 of new equipment which she bought at the end of the year. She paid cash for the equipment. During her first year, Tiffany managed to lower her debt - she now owes the Bank only $15,000. The Bank loan is her only liability. There were no withdrawals from the business this year. Since Tiffany's only has $7,000 of cash left in her business, she is considering going out of business Tiffany has told you "how can I stay in business when, in only 1 year, I have lost most of the cash I started with. Advise Tiffany. Is she better off now than she was at the beginning of the year? Without knowing the individual Revenue and Expense numbers is it possible to precisely compute Tiffany's first year net income? How much net income did Tiffany's earn her first year in business. Answer all parts of this question. (Remember the Accounting Equation - Hint: see if you can compute ending capital; then proceed with your analysis and answer the question)