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    Perking Up Profits at Better Brew and Perfect Blend

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    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
    Assets
    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

    Other data
    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 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.
    4: Visit the world's largest and most respected online coffee buying guide, http://www.coffeereview.com As an owner of a coffee shop, how might you use this resource?
    Mescon, M.H., Bovee, C.L., Thill, J.V. (2001). Business Today (pp. 450). Upper Saddle River, New Jersey: Prentice Hall

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    Solution Preview

    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 ...

    $2.19

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