Accounting for Managers: Financial Analysis of Coffee Break Cafe

This report provides a comprehensive analysis of accounting principles applied to a cafe business, specifically focusing on 'Coffee Break Cafe' as a sole proprietorship. The report begins with a description of the business, its size, and industry, followed by the rationale for selecting a sole proprietorship form. It outlines the sources of finance, including equity, debentures, and bank loans, and presents projected income statements and balance sheets for three years with key assumptions. The report then delves into the role of accounting, the accounting process specific to a cafe, and differentiates between financial and managerial accounting. It highlights the benefits of financial statement analysis for managers, covering profitability, liquidity, and efficiency ratios. The report concludes with a discussion on the distribution or retention of profits, providing a complete overview of the cafe's financial aspects.

Running Head: Accounting for managers
Accounting for managers

Accounting for managers 1
Contents
Description of the business..............................................................................................................2
Size of the business......................................................................................................................2
Industry of the business...............................................................................................................2
Selection of form of business..........................................................................................................3
Sources of finance............................................................................................................................4
Projected income statement and balance sheet................................................................................5
Role of accounting...........................................................................................................................7
Accounting process of cafe..........................................................................................................8
Financial accounting in café........................................................................................................9
Managerial accounting in café...................................................................................................10
Financial statement analysis beneficial for managers...................................................................10
Distribution of profit or retention of profit....................................................................................11
References......................................................................................................................................12

Accounting for managers 2
Description of the business
The new business that has been formed is a café. The main product of café is Coffee. The name
of the café is Coffee Break Café. This business is operated by the single owner who works for
the self-profit. This type of business association is known with the name of the sole
proprietorship. It is a different element for the book keeping reason. An independent company
begins as a sole proprietor. In this sort of business, the proprietor itself needs to hold up under
the duties regarding everyday operations. The coffee café comes under the retail outlets.
Size of the business
Coffee Break Café comes under the small size of the business. The size of the business is
identified with the capital invested by the owner. So the amount invested by the owner in this
business is $1,000, 000.00. The number of employees employed in the business can also help in
determining the size of the business. Talking about the café, the employed employees are less as
compared to the big business.
Industry of the business
Business related to the coffee café comes under the food and beverage industry. This is a very
vast industry that consists of many products. Food and beverage is a noteworthy industry area for
the Australian economy, as far as the two its money related commitment and work. Nourishment
and refreshment handling are Australia's biggest assembling industry. The industry is uniquely
driven by requesting buyers looking for assorted variety, quality, and esteem. The ethnic and
social assorted variety of Australia has reflected in the nourishment extend accessible (Martinez,
2013).

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Selection of form of business
While starting any business owner select the form of business. The form of business includes
sole proprietorship, partnership, a limited liability company or a corporation. The selection of a
form of business over here is a sole proprietorship (Singh, Chaudhary, and Arora, 2014). A sole
proprietorship is the most inexpensive structure of the business. This form of business can come
into the existence with less tax and legal formalities.
 This is one of the businesses which are going to control and manage by the one person.
Hence, the owner will get the freedom to run the business according to their wish (Baik,
Lee, and Lee, 2015).
 The profit of a business is going to be kept by the single owner. There will be no
distribution of the profit.
 The decisions in the business can be taken without any influence of the third party. There
will be privacy in the business.
 Winding up of the business can easily take place if the owner wants. After winding up the
business the owner of the company can keep the entire amount with them (Gitman,
Juchau, and Flanagan, 2015).
 It will be easy to change the legal structure of the business, in case of any circumstances.
The above given are some of the advantages to the business that maintains a sole proprietorship
as a legal form of business. This is the reason behind the selection of the sole proprietorship as a
legal form of business.

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Sources of finance
Sources of finance are the most explorable region, particularly for the new business. It is maybe
the hardest piece of the considerable number of efforts. There are different sources of finance;
that can be decided on the premise of day and age, possession and control, and generation of an
era of a fund. In the new business selection of the sources of finance needs in-depth analysis of
sources. It needs the understanding related to the financing sources. The most common sources
of finance used by the new form business include equity, debenture and a bank loan.
 Equity financing: - A business can finance with the use of equity as a source of finance.
Equity is cash paid in the business by the investors. For raising funds owner of the
company need to raise investment by issuing shared in the business (Agrawal, Catalini,
and Goldfarb, 2014).
 Debentures: - The second most important source of funding includes raising fund
through debentures. A new business can raise funds through issue of debentures in which
the company needs to pay a fixed amount interest (NAGARIA, 2016). The amount of
interest can be paid by the business at precise intervals that may be six months or year.
 Loan from a bank: - The new startup can raise finance by taking a loan from the bank.
A bank credit is a measure of cash obtained for a set period of a concurred reimbursement
plan (Rostamkalaei, and Freel, 2016). The reimbursement sum will rely upon the size and
term of the credit and the rate of intrigue.
According to the capital requirement, the owner can arrange capital from following sources. The
owner can raise amount from equity, a loan from bank and debentures.

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Capital Requirement and
Sources of Capital $1,000,000
Equity
Common stock 600,000.00
Debt
Loan from bank 200,000.00
Debentures 200,000.00
Note:- Assume the capital requirements to start the business is $1,000,000
Projected income statement and balance sheet
The income statement and balance sheet show the accounting value of all of the company's assets
and liabilities. The report shows the analysis of all activities at the time of the accounting period
that affects cash, impacted primarily by financing, investing and operations (Minnis, and
Sutherland, 2017).
Coffee Break Café Plc
Profit & Loss Statement
Amount ($)
2016 2017 2018
Sales $580,000 $649,600 $812,000
Miscellaneous income $0 $64,960 $81,200
A. Total $580,000 $714,560 $893,200
B. Cost of Sales $377,000 $357,280 $446,600
C. Gross Profit (A-B) $203,000 $357,280 $446,600
D. Operating Expenses
Salary $100,000 $105,000 $110,250
Rent $12,000 $12,600 $13,230
Utilities $1,000 $1,050 $1,103
Insurance $500 $525 $551
Depreciation $35,000 $36,750 $38,588
Marketing $10,000 $10,500 $11,025
Maintenance & Repairs $5,000 $5,250 $5,513
Other $2,500 $2,625 $2,756

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Total $166,000 $174,300 $183,015
Operating profit $37,000 $182,980 $263,585
Less: Interest $10,000 $5,000 $2,500
Profit before tax $27,000 $177,980 $261,085
Less: Tax @ 30% $8,100 $53,394 $78,326
Net Profit AT $18,900 $124,586 $182,760

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Coffee Break Café Plc
Balance Sheet
Amount ($)
Assets 2016 2017 2018
Current $600,000 $720,000 $864,000
Fixed $350,000 $350,000 $350,000
Other assets $68,900 $100,000 $100,000
Total Assets $1,018,900 $1,170,000 $1,314,000
Liabilities
Non-Current (Borrowings) $200,000 $100,000 $50,000
Total Liabilities $200,000 $100,000 $50,000
Debentures $200,000
Equity $618,900 $1,070,000 $1,264,000
Total Liabilities & Equity $1,018,900 $1,170,000 $1,314,000
Major Assumptions for Financial Projections: Coffee Break Café
S.
No. Assumptions
1 In regard to sales, it has been assumed that sales of Latte and cappuccino will
be highest. Further assumed that sales of business clothing will be 50% of
latte and that of cappuccino and espresso will be 40% and 20% respectively.
2 In regard to sales, it has further been assumed that the overall sales revenues
will increase at the rate of 12% in 2017 and then accelerate at the rate of 25%
in 2018 and 2019.
3 Cost of sales has been assumed to be 65% in the initial years and then it has
been considered to go down to 55% due to economies of scale.
4 The interest rate for borrowings is assumed to be 5% per annum.
5 Depreciation has been assumed to be 10% as per straight line method.
6 Tax rate 30%, it has been assumed to be constant for all the years.
7
Assume fixed assets include machinery and equipment’s of $200,000+
$150,000
Role of accounting
The role of the accounting in a business is to help external and internal stakeholders to make
good decisions by providing them financial information (Alammar, and Kohn, 2016).

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Accounting helps the café in communicating information to the investors, owners, and managers
that help in evaluating a company's business performance.
Accounting process of cafe
The accounting process is a chain of activities that starts with transactions and finishes with the
closure of books (DRURY, 2013).
Step-1 Analysis of business transactions: - In a café, the accountant can identify a transaction
or events. In this transaction, an owner can not include the personal transactions. This step
involves the business transaction of the café related to the buying supplies from a vendor,
payment of labor cost, salary etc.
Step-2 Make journal entries: - According to the transactions, the business needs to record the
relevant journal entries in the ‘Book of original entry.' These transactions are recorded in the
journal using a double-entry system. These entries befall in at least two accounts, one is credited
and other is debited.

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Step-3 Post to ledger accounts: - Now the café accountant will transfer the journal entries in the
appropriate ledger accounts. It contains the collection of accounts and financial statement.
Ledger accounts are also known as ‘Book of Final Entry'.
Step-4 Prepare trial balance: - The café account will now prepare a trial balance. The trial
balance consists of the general ledger account balances. This balance is created to check the
accuracy of the equality of debit and credit balance.
Step-5 Making adjusting entries: - The accountant will adjust entries to capture the deferred
and accrued amounts. This might include the amount of income and expenses which were not
documented in the books.
Step-6 Adjusted trial balance: - The café accountant needs to adjust the trial balance on the
basis of subtraction and addition of the entries. This is beneficial to understand the equality of
credit and debits.
Step-7 Prepare financial statements: - The café account will prepare the financial statements
that include the income statements, cash flow statement, and balance sheet.
Step-8 Close accounts: - Closure of the temporary accounts including revenue, expenses, losses,
and gain in the business will take place in this step.
Step-9 Post-closing Trial balance: - This is the last step which includes the final trial balance
that is based on the closing journal entries.
Financial accounting in café
In the Coffee Break Café business financial accounting reflect the activities of the company
related to the financial terms. Financial statement throws light on the revenue, assets, liabilities,

Accounting for managers 10
equity and expenses of the business (Edwards, 2013). This report is established by the café to
provide the information to the outside parties. Seeing this information the investors may attract
towards the business and they can make an investment in the business.
Managerial accounting in café
Managerial accounting is also prepared by the café with the aim of helping the managers of the
company. The company can utilize this accounting in making decisions related to the business
(Weygandt, Kimmel, and Kieso, 2015). The managers of the café can find the errors in the
business activity and according they can take the decision.
Financial statement analysis beneficial for managers
In the organization, managers play a vital role in working with the business. The analysis
comprises of the calculation of the various ratios. The manager of the company can understand
the financial position of the company (Petty, et.al. 2015). It helps in taking decision-related to the
investment. The manager of the café can check the operational effectiveness and efficiency of
the business. the financial statement analysis includes different techniques such as cash flow,
ratio analysis, profit, and loss account.
 Profit and loss account can be used by the manager to understand the amount of profit
and loss of the company. Profitability of the business can be checked by the manager
through profitability ratios.
 Liquidity of the business can be checked by the manager with the help of current assets
ratio and quick assets ratio. The debt to equity ratio establishes who owns more of the
company either stakeholders or creditors.

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 An efficiency ratio helps the manager to check the efficiency of the business and how
inventory turns into the revenue of the company.
The financial statement analysis helps the manager of the café to take the correct decision for the
company. These decisions help the company to grow in the market. The manager can use the
financial statement analysis to compare same size company.
Distribution of profit or retention of profit
Coffee Break Café is a newly formed company while managing the consideration the company
should retain most of the profit in the company and distribute the rest of the profit. The
distribution of profit can take place in the ratio of 70:30. Out of this, the company should retain
the 70 of the profit. There is a reason behind keeping the large amount as a retaining earning. In
the newly form business, the requirement of the capital can be fulfilled through retained
earnings. To manage the business operations company require more amount of funds. Retained
earnings can be utilized by the company whenever they want to increase the sales of the business
or they are looking to expand the business. Retained earnings give strengthen to the financial
position of a business and this is the reason it gives financial stability to the business (Lazonick,
2014). Retained earnings play a vital role in increasing the capital that leads to increase in the
market value of the shares.