Better Brew Or Perfect Blend
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Accounting and Banking
Better Brew or Perfect Blend
After years of dreaming about owning you 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.
What factors should you consider before deciding which company to buy? What additional data might be helpful to you? (Not that net income is implied). We have the Balance sheets for the year end which is the statement of financial position and the snapshot of the companys financial position on a particular date. The financial statements give us an indication of how the business is performing and where it stands at a particular time. I would want some history of the two businesses such as the age of the business, profitability, liquidity, activity, and leverage. This information is useful in analyzing how well the company is performing in relation to previous performance, the economy as a whole, and the companys competition (Bovйe, Thill, & Mescon, 2005, p. 421). Other factors to consider are the appearance of the business, length of time of ownership, seasonal peaks, reasons for personal withdrawals, owners salaries, supplier information, existing inventory systems, type and age of equipment, leases on equipment and buildings, available space for the business, possibilities for expansion, number of employees, benefits offered to employees, and accounting principles used. Additional data that would be helpful include other financial documents including the an income statement to get a general sense of the companys size and performance as well as the statement of cash flows to see how the companys cash was received and spent for the operations, investments, and financing (Bovйe, et al., 2005). Another factor to consider is information on the industry average or regional competitors.
What questions should you ask about the methods used to record revenues and expenses? It is important to know if the accounting for the businesses is done on a cash-basis or accrual-basis. In the cash-basis method, the revenue is recognized when cash is received and the expense is recognized when the cash is paid out. Revenues are also called cash receipts and cash payments (Bovйe, et al., 2005). The accrual-based method records financial events based on events that change you net worth by recording and recognizing revenues and expenses in the period in which they incur even though cash is not received or paid in a credit transaction (Bovйe, et al., 2005). The accrual-basis accounting method is GAAP compliant and is more costly to maintain.
On the basis of the data provided, which company would you purchase? Detail the process you used to make your decision. At first glance, one might consider that Better Brew would be the least risky choice with a lower level of debt. However, using ratio analysis, we can use quantitative measures to compare each companys financial results from the data given on the balance sheets. The following table shows a comparison of the current ratio, quick ratio, debt to equity ratio, and the debt to total assets ratio results. The Current ratio is a measure of the firms ability to meet its short-term obligations when they are due and a ratio of 2.0 is considered safe. The quick ratio, or acid-test ratio, is also used to measure liquidity and short-term obligations where a ratio of 1.0 is considered safe (Bovйe, et al., 2005). Although the ratios for both companies are not at the level of safe risk, Perfect Blend has better liquidity ratios at 1.24 and 0.76 respectively. The Debt-to-Equity ratio indicates the extent that a company is financed by debt and the lower this ratio, the lower the risk. Again, the Perfect Blend Company has a lower ratio of finance from debt and equity when compared to Better Brews 2.80. The final ratio that we have for comparison is the Debt-to-Total Assets ratio. This ratio is a measure of the companys ability to carry long-term debt and should not exceed 50% of the value of the total assets. Neither of these companies is below the 50% level, but the Perfect Blend Company is again the lower risk at 0.66 percent for Debt-to-Total Assets ratio.
Current
Quick
Debt to
Debt to
Ratio
Ratio
Equity
Total Assets
Current Assets
Current Assets – Inv.
Total Liabilities
Total Liabilities
Current Liabilities
Current Liabilities
Total Equity
Total Assets
Better Brew
23,000 / 21,000
12,000 / 21,000
70,000 / 25,000
70,000 / 95,000
total
Perfect Blend
47,000 / 38,000
29,000 / 38,000
106,000 / 55,000
106,000 / 161,000
total
In conclusion, without the extra data and information that would be necessary to make the best financial choice of companies to purchase, I would be more inclined to purchase the Perfect Blend Company based on the financial ratios analyzed above. I think that Perfect Blend has made improvements in the operation that has allowed the company to service more customers and also has the best opportunity for growth.
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