Case Requirements - Boost Juice Franchise: Legal Forms, Financing, and Financial Statement Analysis

Forming the Business

Case Requirements
Sean has hired you to provide him with some help and advice.   Prepare a written report that addresses Sean’s questions using the headings in bold below.  The responses under each of the headings should be written in paragraph form and provide clear answers & recommendations.
Note to Students:  Your responses will be evaluated for “depth in discussion”.  Please state facts and opinions that are substantiated with critical thought and reasoning.  Where possible, use case facts in your answer.  Remember, part of the skills you will need in your career are the ability to evaluate alternatives, make recommendations, and communicate your findings in a professional way.  Be clear and concise – quality of answers will be more important than quantity of words that lack depth.

Sean’s Questions
Forming the Business
1.What legal forms are available to me in order to purchase & run a Booster Juice franchise?                        Discuss the advantages & disadvantages of each alternative.           
2.Which legal form would you recommend given my personal situation and my overall business goals?  Why?                                        
3.Inventory is currently being managed using a Periodic system with a FIFO cost flow assumption.   What does this mean?  Given the nature of the business, would you recommend any changes to how inventory is being accounted for?                                  
4.The business employs 12 staff.  How can I be sure that all cash collected is recorded and “free” drinks aren’t being given to “friends”?  Some suggestions over internal controls with respect to cash and inventory would be appreciated.                      
Sources of Financing
5.I need $500,000 to purchase the pre-existing Booster Juice franchise in Edmonton, Alberta. I’m aware my $150,000 in personal savings is insufficient.  What other financing alternatives can be used to raise the rest of the $350,000 that I need?  Should I use only one source?  Or a combination of sources?                     Explain the advantages and disadvantages of each financing alternative.   
(Hint:  Compare & contrast debt financing & equity financing.  Do NOT consider bonds as these are typically issued  by large publicly traded companies.  With respect to equity financing, consider both common shares as well as preferred shares.)
6.I’ve heard the term “capital structure” before.  What does this mean? And how would capital structure be relevant to me, particularly if I want to grow the business?               
Financial Statement Users
7.All organizations need to prepare financial statements.  Who would be the main “users” of my financial statements in the first year of operations?  What types of decisions would the financial statement users be making?                             



Financial Statement Analysis
8.What is “Quality of Earnings”?                                    
9.Are the earnings of this Booster Juice location of high or low quality?  Why or why not?   
[4 marks]
10.How effective has Booster Juice been in managing its cash flows?  Are there any items of concern?    Also, why is “depreciation expense” and the “loss on sale of equipment” added back to net income in the operating activities section of the cash flow statement?  Where is the cash part of these transactions?                                                       [16 marks]
(Hint: Identify the cash flow “profile” relative to Exhibit 5.16 of the textbook, and then conduct a detailed “read” of the Cash Flow Statement similar to how we examined our cash flow problems in class.  Identify and discuss specific “sources” and “uses” of cash from operating, investing, and financing activities to explain to Sean why the cash balanced “changed” over the year.)

11.The seller said financial statement ratio analysis may help in my purchase decision.  Calculate and explain the following ratios for the year ended, December 31 2020 and compare the results to industry standards (Appendix B).  What do these ratios indicate about the financial “health” of this Booster Juice location?  How would this be relevant in my decision to purchase?           
b)Profit Margin Ratio
c)Return on Total Assets
d)Return on Equity