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Accounting And Banking Essay

819 words - 3 pages

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 the liability is incurred not when it is paid.(Bovée/Thill/Mescon, 2007)Accrual based accounting provides a more accurate picture of assets and liabilities since expenses and revenues are recorded when they are incurred versus when they are paid or received. (Bovée/Thill/Mescon, 2007)Based on the balance sheets provided, I would purchase the Better Brew coffee shop. The company, though it has fewer assets, it also has less liabilities. Though I can purchase the Perfect Blend for the same price, with the Better Brew Company, I have more of an opportunity to realize profits sooner. I do not have as much long-term debt, and my accounts payables are lower. With a higher capital balance, I am able to...

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