Mgt 430

Financial information that is used in a company's financial statements is important not only to the company but to those that might have interest in investing in it. The information within allows managers and owners to plan and control the operation of the company and most importantly to make well informed business decisions. Knowing whether or not a company is creditworthy is why financial information is of great interest to suppliers, banks, other lenders, investors and shareholders. It is essential that companies abide by the rules set forth by the generally accepted accounting standards (GAAP). The intention of these principles is to present a rational and accurate picture of a company's financial position.

Factors to consider before deciding which company to purchase

Of course there are financial questions and other areas of concern that need to be evaluated before purchasing a business of any kind.

* Revenue and income generated by the business in the last 3 to 5 years

* What is the liquidity ratio--very critical if the company has a significant quantity of bank loans

* Current relationship with the banks--for future loans if need be

* Current asset value--the machines that are used to operate the business

* Depreciation of those machines--when and how much

* How does the company compare to those that are similar

* Why makes this company unique over others in the area

* Company's customer base--can we relate and build a relationship of our own

* Relationship with suppliers

* Current employees--are they trained to our satisfaction

Research needs to be done in the area of why the current owner is selling. If the owner is just retiring then no true concern, but if he/she is selling because of low profits, then questions are then turned to us as new buyers. Are we able to increase customer base so that profit is increased? We do not want to end up like the last owners in a year or two.

What additional data might be helpful to you?

It would be beneficial to see past year's financial statements to see how the business has, with a bit of luck, grown. Seeing the financial trends of each business over the same period of time would allow my partners and I to see where the business ought to be advancing towards in the future. Comparing the businesses side by side using ratio analysis would give us a better observation of which business is operating at a healthier echelon. The most commonly used ratios to compare businesses to one another are profitability ratio, liquidity ratio, inventory turnover ratio, accounts receivable ratios, and debt to equity ratios. Using one or all of these ratios can facilitate us in seeing deeper into each of the businesses. Other information to know about is the credit terms of each business for both accounts payable and receivable.

What questions should you ask about the methods used to record revenues and expenses?

Both companies have accounts receivable and accounts payable, which means they should be using accrual basis accounting method. There is a possibility that they are using a combination of both cash-basis and accrual basis. The different methods can give different amounts so knowing which one is used is vital. Also, knowing whether they use a single entry or double entry method when preparing the books. In the past, double-entry journaling was considered the norm, but as time goes on, the single-entry method is becoming a more commonly used method in small businesses.

On the basis of the data provided, which company would you purchase? Detail the process you used to make your decision.

Based on the given data, I would purchase Perfect Blend. Perfect Blend has a higher value of assets of $161,000 compared to Better Blend's $95,000. Perfect Blend also has more cash, which more liquid than money being tied up in assets. In addition, Perfect Blend has a higher income level than that of Better Blend.

Using the given information, my partners and I can determine how much income each of the companies received in 2003.

Perfect Blend:

$12,000 start of 2003

- 38,000 personal withdrawals from cash during 2003

+32,000 owners' investments during 2003

$ 6,000

+55,000 Owner's