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    Better Brew and Perfect Blend : What factors should you consider before deciding which company to buy?

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    Buying a Coffee Company


    10809 Q ACC

    Buying a Coffee Company
    Perking up Profits at Better Brew and Perfect Blend

    After years of dreaming about owning your own business, you decided that owning a coffee shop would be perfect. 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

    Other data
    Personal withdrawals 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 methods 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.

    Assignment adapted from: Mescon, M.H., Bovee, C.L., Thill, J.V. (2001). Business Today (pp. 450). Upper Saddle River, New Jersey: Prentice Hall

    Submit your assignment to your instructor via the drop box.
    In comparing the coffee companies, you need to determine which ratios can be calculated from your text (see the ratio page 421 in text). Also, be sure to study what is considered current assets and current liabilities in the text since that influences the ratio analysis. Students should include the actual calculations for both companies and their meanings using the Bovee text for citations. Also, you need to state which company you would choose to invest in. This assignment takes some time and is worth a lot of points, so start early. There will be a chat on ratios on Sunday of week 5 but be sure to complete the reading before attending chat (it will make more sense to you).

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    Solution Preview

    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.

    ☼ Is the double entry system is being used?
    ☼ The depreciation ...

    Solution Summary

    Here is just a sample of what you'll find in this solution:

    "The proprietary ratio for Better Brew is 25,000/95,000 =0.26 but the proprietary ratio for Perfect Blend is 55,000/161,000=0.34. 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."