Question

Melissa Parker is considering the merits of buying a small café in Adelaide. The café is fully furnished and equipped. The business has been operating for the last 3 years.The café premises are not owned, but leased. The current lease expires in two years, but there are options for a further five-year term in place. The current lease costs $30,000 per annum in rent. The current owner, Philip Taylor, started the business in 2017 with a capital of $75,000. He is asking for a price of $100,000 for the business. Philip provided the following information:

Table 1: Info for the year ended June 30, 2020
Sales Revenue	400000
Cost of Sales	175000
Gross Profit	225000
Other Expenses	277000
Loss	-52000

Upon a request from Melissa, Philip provided the following information about the ‘other expenses’ of $277,000from the records of the business:

Table 2 : Info about ‘Other Expenses’
Coffee Machine	$ 100,000
Insurance	6000
Computers & Software	15000
Telephone Usage	4000
Car Maintenance Expense	8000
Interest paid to bank	2000
Furniture	50,000
Shop Cleaning	10,000
Servicing of Coffee Machines	8000
Internet	2000
Electricity	10,000
Water bill	7000
Advertising & memberships	25,000
Lease Rent	30,000
Total		$277,000

In addition, Philip informed the following:

The business took a bank loan of $50,000, which is repayable in 2024.

Accounts payable and cash balance as at June 30, 2020 are $5,000 and $31,500 respectively.

The owner takes out $500 every week from the business.

All sales are cash sales.

Following detailed discussions with Philip, Melissa discovered that:

No attempt has been made to segregate personal and business expenses.Electricity, water and car maintenance were estimated to be 80% business and 20% owner’s personal purposes.

The ‘coffee machine’, ‘computers & software’ and ‘furniture’ were bought on July 1, 2019and estimated to have a useful life of 5years each.

Tax rate of 30%

Questions

1.Explain why not separating the figures into those relating to personal or business aspects may cause problems for decision-making.

2.Prepare a Statement of Financial Performance and Statement of Financial Position for the year ended June 30, 2020 and as at June 30,2020 respectively.

3.Melissa expects a 25% return on investment (return on equity) from this business. Would the business be able to generate this rate of return?

4.What other factors (financial and non-financial) might be worth considering by Melissa in reaching a final decision?

Answer 1

1. It is business profit should consider based upon business performance not clubbing business and personal expenses. Yes personal expenses if directly invloved relating to run business , in that case he should consdier that other to manage bsiness if profit is not enough it end of loss of business. in this case if persnal expenses will be same to run business it should limit with same amount, at the end it is not causing any problem after considering personal expensed Melissa meeting expectioan. see Eq1. Screens hot.

2. Refer Table 1 &2 eblow for income and baalance sheet

3. Yes Business is able to generate 25% of income refer Table 3

4. Net profit after meeting persoanl expense relates to run business

Equation 1 Revised profit and loss account after segragating personal expenses and depreciation Sales Revenue 400,000.00 Cost of Sales 175,000.00 Gross profit 225,000.00 Other expenses Net profit 225,000.00 Estimated profit 25% on 100000 25,000.00 Personal expense 5,000.00 Table 1 Bank loan Payable Net profit Business price 50000 Cash 5000 Cofee Machin 59000 Computer 100000 Furniture Other Asset 31500 80000 after 1 yr Dep 12000 after 1 yrs Dep 40000 after 1 yrsDep 50500 214,000.00 214,000.00 Table 2 Revised profit and loss account after segragating personal expenses and depreciation Sales Revenue 400,000.00 Cost of Sales 175,000.00 Gross profit 225,000.00 Other expenses 166,000.00 Below is break up Net profit 59,000.00 Cofee Machin 20,000.00 Insurance 6,000.00 Computer 3,000.00 Telephone usage 4,000.00 Car Maint expnses 6,400.00 Bank interets 2,000.00 Furniture 10,000.00 Shop cleaning 10,000.00 Service of cofee Machin 8,000.00 Intenet 2,000.00 Electricity 8,000.00 Water bill 5,600.00 Advertising 25,000.00 Rent 30,000.00 Payment to owner as royalty 500 per week 26,000.00 166,000.00