Understanding The Concepts Essay

1452 WordsApr 15, 20126 Pages
UNDERSTANDING THE CONCEPTS Page 1. Understanding The Concepts Melissa Young Lorna Johnson Finance 100 2/26/2012 UNDERSTANDING THE CONCEPTS Page 2. 1. Imagine your are a small business owner. How will you analyze your business using ratios? Compare it to the financial ratios that are important to a financial manager for a large corporation. I am the manager of a residential housecleaning service. The name of the business is called Melissa's Home Cleaning. We specialize in cleaning the interior of the home, such as kitchen, bathrooms, bedrooms, dens or family rooms, recreation rooms, livingrooms, and finished basements. Our services provided range from dusting, sweeping, mopping, running the dishwasher, cleaning appliances, countertops, sinks, vacuuming, doing laundry, cleaning tubs and toilets, ironing and hanging clothes, washing windows, light fixtures and ceiling fans, and emptying the trash cans. Our company's assets are cash, inventory, accounts receivable, building, furniture and fixtures. My liabilities are notes and accounts payable, contingent liabilities. The total assets are about $65,000, and my total liabilities are about $18,000. My total equity is $47,000. This gives my company a 72% equity ratio. This ratio is important to companies because it is a good indicator of leverage used by a company. 2. Explain the advantages and disadvantages of debt financing and why a organization would choose to issue stocks rather than bonds to generate funds. One advantage of debt financing is that it allows the founders of the company to maintain control and ownership of the company. The owner of the company does not have to answer to anyone, such as; investors or partners. The owner of the company is the only one who gets to make all of the decisions. The owner will, also, own, all, the profits that are made. Another

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