Accounting and Banking

Essay by grandmadiUniversity, Bachelor'sA+, July 2007

download word file, 3 pages 5.0

Owning a Coffee ShopThe Better Brew and Perfect Blend coffee shops are both for sale. The current owners are asking the same price for both establishments, however their balance sheets vary significantly. To determine which business would be the best investment for my partners and me, a number of factors must be taken into consideration such as the company's ability to pay its bills, the future potential to earn a profit, its historical performance, the way it is currently operated, competition, and the staff. (Bovée/Thill/Mescon, 2007) (Sawyer, 2007)Balance sheets were provided for each company, however additional information such as operating expenses and sales figures, that are found on the Income Statement would be helpful in understanding general operating expenses and day-to-day operations. This knowledge is critical to determine the financial health of these businesses as well as understanding their cash flow. (Bovée/Thill/Mescon, 2007)The balance sheets show that Perfect Blend has more cash on hand, however they also have more long-term debt with $19,000 more in bank loans.

Better Brew has less owner's equity initially invested in the business at start-up, and a higher capital balance providing the opportunity for additional investment in the business. (Mescon/Bovee/Thill, 2001)Understanding whether each business uses the cash or accrual accounting method is important to understanding the viability of the assets and liabilities listed on the balance sheet. To determine which accounting method is used, the following questions need to be answered by the current owners of both businesses:Does the company use cash basis accounting, whereby revenues are only recorded when funds are actually received for a sale and expenses are recorded when they are actually paid;Does the company use accrual basis accounting, whereby revenues are recorded when the sale is made regardless of whether the funds are received and expenses are recorded when...