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Making a Decision Regarding Loans

Details: The proprietors of two businesses, L.L. Sams Company and Melinda Garcia Career Services, have sought business loans from you. To decide whether to make the loans, you have requested their balance sheets. Solely on the basis of these balance sheets, to which entity would you be more comfortable lending money? Explain fully, citing specific items such as the accounting equation and amounts from the balance sheets. In addition to balance sheet data, what other information would you require?

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Accounting is the means by which information about an enterprise is communicated and, thus, is sometimes called the language of business. Organization comprises the collection of assets and the corresponding claims against those assets. The claims can be divided into the claims of creditors and owners (i.e., liabilities and owners' equity). This leads to the fundamental accounting equation:

assets = liabilities + owners' equity.

Assets: Assets are the economic resources of the entity, and include such items as cash, accounts receivable, inventories, land, buildings, equipment, and even intangible assets like patents and other legal rights and claims. Assets are presumed to entail ...

Solution Summary

In about 400 words, this solution discusses the basic accounting equation and the meaning of accounting terms including assets, liabilities, and owner's equity, in order to explain how this type of investment decision could be made. Two references are included.

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