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.
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Better Brew
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Perfect Blend
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Assets
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|
|
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Cash
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$10,000
|
$25,000
|
|
Accounts receivable
|
2,000
|
4,000
|
|
Coffee equipment
|
50,000
|
80,000
|
|
Supplies
|
11,000
|
18,000
|
|
Other assets
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22,000
|
34,000
|
|
TOTAL ASSETS
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$95,000
|
$161,000
|
|
|
|
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Liabilities and Owners' Equity
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|
|
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Accounts payable
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$21,000
|
$38,000
|
|
Bank loans payable
|
49,000
|
68,000
|
|
Owner's equity
|
25,000
|
55,000
|
|
TOTAL LIABILITIES & OWNERS' EQUITY
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$95,000
|
$161,000
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|
|
|
|
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Other data
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|
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Personal withdrawls from cash during 2003
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$40,000
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$38,000
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|
Owners' investments in business during 2003
|
$16,000
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$32,000
|
|
Capital balances for each business on January 1, 2003
|
$30,000
|
$12,000
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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.