Rather than start from scratch, however, you and your partners decide to look at two existing establishments, Better Brew and Perfect Blend. The two are for sale at the same price, and they are located in equally attractive areas. You manage to get enough financial data to compare the year-end condition of the two companies, as shown below. Study the numbers carefully; your livelihood depends on choosing wisely between the two establishments.
BETTER BREW PERFECT BLEND
CASH $10,000 $25,000
ACCOUNTS RECEIVABLE 2,000 4,000
COFFEE EQUIPMENT 50,000 80,000
SUPPLIES 11,000 18,000
OTHER ASSETS 22,000 34,000
TOTAL ASSETS $95,000 $161,000
Liabilities and Owners' Equity
ACCOUNTS PAYABLE $21,000 $38,000
BANK LOANS PAYABLE 49,000 68,000
OWNER'S EQUITY 25,000 55,000
TOTAL LIABILITIES & OWNERS' EQUITY $95,000 $161,000
Personal withdrawls from cash during 2003 $40,000 $38,000
Owners' investments in business during 2003 16,000 32,000
Capital balances for each business on
January 1, 2003 30,000 12,000
December 31, 2003, year end balance sheets
1. What factors should you consider before deciding which company to buy? What additional data might be helpful to you? (NOTE THAT NET INCOME IS IMPLIED)
2. What questions should you ask about the method used to record revenues and expenses?
3. On the basis of the data provided, which company would you purchase? Detail the process you used to make your decision.
REMEMBER TO CITE THE SOURCES WHEN NECESSARY AND TO JUSTIFY YOUR RESPONSES.
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FACTORS YOU SHOULD CONSIDER BEFORE DECIDING WHICH COMPANY TO BUY/ ADDITIONAL DATA REQURIED
The factors you should consider before buying the company would include:
1. The owner's equity.
2. The loans outstanding.
3. The current level of sales.
4. The goodwill of the company.
5. The current cash in hand.
6. The standard of the equipment and its condition.
7. The composition of 'the other assets'
8. The supplies in hand.
Additional data required:
1. The current sales of the company.
2. The net profit of the company.
3. The earning before tax.
4. The tax paid.
5. The interest burden on bank loan.
6. Fictitious assets.
7. Cost of goods sold.
8. Amount of doubtful/bad debts.
QUESTIONS ABOUT THE METHODS USED TO RECORD REVENUES AND EXPENSES
☼ Is the double entry system is being used?
☼ The depreciation charged on coffee equipment.
☼ Is the ...
Here is just a sample of what you'll find in this solution:
"The proprietary ratio is appropriate in case of Perfect Blend as it should be close to 1:3. So Perfect Blend is the better buy."