Buying a Coffee Company

Buying a Coffee Company

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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
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.

To make an informed decision on which coffee company to buy, you should consider the following factors:

1. Financial performance: Compare the assets, liabilities, and owners' equity of both companies. Analyze the cash position, accounts receivable, coffee equipment, supplies, and other assets. Similarly, examine the accounts payable, bank loans payable, and owner's equity. Look for any significant differences that might impact profitability and the financial health of the business.

2. Profitability: While the net income is not explicitly provided, it is implied in the question. Consider the net income generated by each company during the year. Higher net income indicates a more profitable business.

3. Cash flow: Assess the cash flow of both businesses. Evaluate the personal withdrawals from cash and owners' investments made during the year. A higher cash flow suggests better financial stability and potential for growth.

4. Owners' equity: Look at the capital balances at the beginning and end of the year. A significant increase in owners' equity indicates successful business operations.

Additional data that might be helpful in making your decision includes:

- Revenue and expense details: It would be useful to have information on the coffee companies' sales revenue and various expenses such as rent, utilities, wages, and costs of goods sold. This would help you evaluate the profitability and sustainability of each business.

- Customer base and reputation: Understanding the customer base and reputation of both coffee companies can provide insights into their market presence and potential for growth.

- Market analysis: Consider conducting a market analysis to assess the demand for coffee in each location and the competition faced by the businesses.

Regarding the methods used to record revenues and expenses, you should ask the following questions:

- Are they following recognized accounting principles? Ensuring that proper accounting practices are followed is important for accurate financial reporting.

- How do they recognize revenue? Inquire about their revenue recognition policy to understand if it aligns with industry standards.

- Are there any unusual accounting treatments or practices? Look for any discrepancies or deviations from standard accounting practices that may impact the accuracy of financial statements.

Based on the provided data, you can compare Better Brew and Perfect Blend using the factors mentioned above. Assess the financial performance, profitability, cash flow, and owners' equity of both companies. Consider any additional data that may be available and relevant.

After careful analysis, make a reasoned decision by selecting the company that demonstrates strong financials, profitability, and potential for growth. It is crucial to consider your individual goals, preferences, and risk tolerance when making this decision.

It is important to note that this is a hypothetical scenario, and the data provided is limited. In a real-world situation, additional due diligence, market research, and a thorough assessment of the business would be necessary before making a final decision.