Consider the following Proprietorship. Tifany Collins is the owner and operator

Question

Consider the following Proprietorship. Tifany Collins is the owner and operator of an interior decorating business called Tiffany's." It is Tiffany's first year in business. Tiffany started her business with a personal cash investment of $20,000. Her b 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 usiness also borrowed $20,000 additional cash from the Bank. By the end of the first year cash was 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 income did Tiffany's earn her first year in business. Answe Equation - Hint: see if you can compute ending capital; it possible to precisely compute Tiffany's first year net income? How much net r all parts of this question. (Remember the Accounting then proceed with your analysis and answer the question)

Explanation / Answer

Step 1 - Yes tiffany is better by now since she has more assets and more capital and reduced liabilities

Step 2 - Yes it is possible to calculate the net income through cash account and account receivables

Credit Sales = $18000

Cash Account

Total Sales (Income)

Step 3 - Accounting Equation

Assets = Capital + Liabilities

Beginning of the year

End of the year

Hence Capital at the end of year is $60000 more than $20000 From beginning of the year because of Income of $40000

Particulars Debit Particulars Credit To capital $20000 By Assets $50000 To Borrowings $20000 By Borrowing ($20000 - $15000) $5000 To Cash sales (Balance) $22000 By closing balance $7000 Total $62000 Total $62000

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