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Prudent investing, equity capital choices, basic accounting

Investing in the Stock Market
Assume your grandparents have just given you $20,000 on the condition that you invest the money in the stock market. As you contemplate making your investment choices... what accounting information do you want to help identify companies that will have high future rates of return?

Creditor and Investor Information Needs
Ink Spot is a small company that has been in business for two years. Wilford Smith, the president of the company, has decided that it is time to expand. He needs $10,000 to purchase additional equipment and to pay for increased operating expenses. Wilford can either apply for a loan at First City Bank, or he can issue more stock (1,000 shares are outstanding) to new investors.
1. Assuming that you are the loan officer at First City Bank, what information would you request from Ink Spot before deciding whether to make the loan?
2. As a potential investor in Ink Spot, what information would you need to make a good investment decision?

General Questions
? How does understanding the mechanics of accounting help a businessperson who has no intention of practicing accounting?

? What is a chart of accounts? What is its purpose?

? When are revenues generally recognized (recorded)?

? Explain why accrual-basis accounting is more appropriate than cash-basis accounting for most businesses.

? Why are supplies not considered inventory? What type of account is Supplies on Hand?

? Explain why there are alternative ways of recording certain transactions, either as assets or expenses, or as liabilities or revenues.

Solution Preview

Investing in the Stock Market
Assume your grandparents have just given you $20,000 on the condition that you invest the money in the stock market. As you contemplate making your investment choices... what accounting information do you want to help identify companies that will have high future rates of return?

The ability to read and understand financial statements will tell you where a company has been. All of the following might help you see where the company is heading from here: reading analyst reports that discuss financial issues; studying trend analysis in stock prices, dividend yields; understanding and applying business ratios; reading comparative financial data of competitor companies.

Creditor and Investor Information Needs
Ink Spot is a small company that has been in business for two years. Wilford Smith, the president of the company, has decided that it is time to expand. He needs $10,000 to purchase additional equipment and to pay for increased operating expenses. Wilford can either apply for a loan at First City Bank, or he can issue more stock (1,000 shares are outstanding) to new investors.

1. Assuming that you are the loan officer at First City Bank, what information would you request from Ink Spot before deciding whether to make the loan?
The loan officer should ask for copies of financial statements for the current year with comparatives to the startup year. He might ask for accounts receivable and accounts payable listings as well as more specific information on the use of the funds. Borrowing money to pay to pay for increased operating expenses is not a good thing. That might kill the deal right there because revenue should be increasing as expenses ...

Solution Summary

The solution is lengthy because it addresses every question in the problem and uses examples for clarity

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