Problem:
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 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.
NOTE: for the coffee houses, decide which ratios can calculated from the information given above. Then give the formula for each and the results for each of the coffee houses. Then explain why one ratio for Co. A is better than Co. B. There are 4 specific ratios to be used in the analysis. The ratio results will be favorable to one copany. Then favorable to the other. Then decide of the combined 4 calculations, which company you would purchase and WHY?
Assignment adapted from: Mescon, M.H., Bovee, C.L., Thill, J.V. (2001). Excellence Business Today. Upper Saddle River, New Jersey: Prentice Hall