Question

1. A summary of cash transactions is provided in the Appendixes. Based on the cash transactions, who appears to have done better? Include which components you considered in your answer. 2. Explain what should be considered when deciding who did better"'? 3. Now based on the income statements provided at the end of this document who "did better”? Include which components you considered in your answer. 4. Now based on the balance sheet what evidence is there regarding who "did better"? Include which components you considered in your answer. 5. Review the building purchase arrangement that Raphael has committed to and compare the total reported cost of the current year with the rent expense that Gabriel has arranged. What, if any, benefit is there in owning the building and what do you foresee as a likely outcome of the current loan arrangement? What's your view regarding the business decision to purchase the building? 6. The statements of cash flows provided at the end of this document reports cash activities from operating, investing, and financing. Which company had better cash from operations? What is the critical factor when comparing cash from operations between the two companies?

Answer 1

Answer-

(1 ) Net Cash Flow and Payback Period Computation

                                         Raphael's Cupcake Shoppe                            Gabriel's Cupcake Shoppe

(A)   Total Cash Outflow                    ₤ 988,350                                                      ₤ 595,000

(B)   Total Cash Inflow                       ₤ 1030,000                                                     ₤ 625,000

(C) Net Cash Flow (b-a)                     ₤ 41,650                                                       ₤ 30,000

Decision                                  Better    

Payback Period (a/b)   ₤ 988,350/1030,000                                     ₤ 595,000/625,000     = 0.9595 = 0.952                

Decision               Better

Borrowing Cost                                ₤ 31,350                                                         NIL

Decision                                                                                                                 Better

(2) If we compare net cashflow , we find raphael's earning is better than gabriel's earning. while when we compare payback period , gabriel's performance is better than raphael's performance. so, I considered both method by comparing net cash flow and payback period. Also we can consider interest or debt cost which in case of raphael's is ₤ 31,350 and in case of gabriel's is nil. So gabriel's cash outflow is lower, so positive cash flow, having zero debt, keeps gabriel's a better decision.

(3) Gross Income Ratio

                                     Raphael's Cupcake Shoppe                            Gabriel's Cupcake Shoppe

Net Income/Revenue   ₤ 19650/410000 ₤ 32,700/610000

= 4.79 % = 5.36 %

Decision - Better

(4) Asset Turnover Ratio and ROI                      

                                      Raphael's Cupcake Shoppe                    Gabriel's Cupcake Shoppe

                  

Asset Turnover Ratio =              ₤ 410,000/ 637500                                      ₤ 610000/132700

(Net Sales / Avg. Total Asset)        = 0.643                                                         = 4.59

Decision                                                                                                             Better

ROI                                                

Net Profit / Total Investment * 100       ₤ 19650/64650                                         ₤ 32700/107700

                                                       = 0.3039                                                      = 0.3036

Decision                                        Equal Performance                                      Equal Peroformance

(5)     Analysis of Building Purchase Arrangement and Interest Cost

                                               Raphael's Cupcake Shoppe                    Gabriel's Cupcake Shoppe

Building Purchase Cost               ₤ 6,00,000 NIL

Tax Allowed Deductible Expense

Interest on Cost ₤ 31350   

Depreciation ₤ 20,000

Rent Expense                                                                                                  ₤ 16800

Total ₤ 51,350 ₤ 16800

If we compare above factors , we find it s better to have gabriel's model, because debt cost is nil. and therefore, i recommend not to purchase building, We can save interest cost as opportunity cost ₤ 31,350 by incurring rent of ₤ 16800.

(6) Comparison of Net Cash Flow From Operating Activities and Critical Factors

           Raphael's Cupcake Shoppe                    Gabriel's Cupcake Shoppe

Net Cash For Operating Activities       ₤ 58,650                                                ₤ 9,000

Decision                                           Better Performance

Revenue receipt, vendor expenses and interest cost are the critical factor in determining the net cash flow from operations.In case of Raphael's , revenue receipt are higher than gabriel's. and the vendor expense are lower than gapriel's. so the cash flow are better.,

also , one critical factor in determining the cash flow is interest cost , which is NIl in case of gabriel's case.

Important- All parts of questions are answered sequence wise. I considered all important factor for determining the performance. Please upvote if you are satisfied with my answer.