Accounting in Business – Brew Haven Financial Analysis & Expansion Decision

Carefully study the following scenario related to a hypothetical company – Brew Haven Speciality Coffee

Brew Haven Specialty Coffee

Brew Haven Specialty Coffee is an independent café located near a university campus. Over the past four years, the business has built a loyal customer base by serving specialty coffee, handcrafted beverages and light meals. In addition to walk-in customers, Brew Haven has recently expanded its services by providing catering for university events and accepting orders through online food delivery platforms.

Demand for Brew Haven’s products has increased steadily throughout 2026. Encouraged by this growth, the Owner is considering opening a second café in a nearby commercial area. The proposed expansion would require an additional RM180,000 bank loan to finance renovation works, coffee equipment and initial operating costs.

The Owner has asked you, a Junior Business Consultant, to review the business’s financial performance before making the expansion decision. A staff member of Brew Haven has prepared the financial statements, but several transactions that occurred before 31 December 2026 have not yet been reflected in the draft Income Statement.

Your role is to determine Brew Haven’s actual financial performance by considering the additional information provided, analyse the business’s financial position using the adjusted financial information, and provide a recommendation on whether the proposed expansion should proceed.

Financial Information

The following information is provided:

• Draft Income Statement for the financial year ended 31 December 2026
• Cash Flow Summary for the financial year ended 31 December 2026
• Additional information relating to transactions that have not yet been reflected in the draft Income Statement
• Adjusted Statement of Financial Position as at 31 December 2026

Table 1 Draft Income Statement

For the Financial Year Ended 31 December 2026

Table 2 Cash Flow Summary

For the Financial Year Ended 31 December 2026

Additional Information

The following transactions occurred before 31 December 2026, but have not yet been reflected in the draft Income Statement.

1. Unrecorded Credit Sales

During the final week of December 2026, Brew Haven completed catering orders worth RM8,000. The food and beverages were delivered before 31 December 2026, but payment will only be received in January 2027. These sales have not yet been recorded.

2. Outstanding Wages

Employees worked additional shifts during the busy holiday period. Wages of RM10,000 relating to December 2026 have not yet been paid and recorded.

3. Prepaid Insurance

On 1 October 2026, Brew Haven paid RM24,000 for a 12-month insurance policy. The full amount has been recorded as Insurance Expense.

4. Depreciation

Depreciation expense for the year should be RM36,000, but only RM16,000 has been recorded.

Table 3 Adjusted Statement of Financial Position

As at 31 December 2026

This Statement of Financial Position has already been adjusted to reflect the additional information provided. Students are not required to prepare or adjust this statement. Use this statement together with your adjusted Income Statement from Task 1 when completing Tasks 2 and 3.

Assets

Liabilities and Owner’s Equity

Your Tasks

Task 1: Determine Brew Haven’s Actual Profit

Using the draft Income Statement and the additional information provided:

1. Determine Brew Haven’s adjusted net profit for the financial year ended 31 December 2026 by applying the accrual accounting principle. For each adjustment, explain why it is required and show your calculations clearly, where applicable.

2. Compare and comment on the adjusted net profit with the draft net profit.

3. Evaluate whether the Owner’s view that the business performed well is supported after considering the additional information. In your discussion, explain how applying the accrual accounting principle provides a more accurate assessment of Brew Haven’s financial performance.

Task 2: Analyse Brew Haven’s Financial Performance and Financial Position

The company’s financial ratios for 2026 are provided below:

Using the adjusted Income Statement from Task 1, the adjusted Statement of Financial Position, the Cash Flow Summary, the financial ratios and the information provided in the business scenario:

1. Interpret what the ratios indicate about Brew Haven’s business, and support your analysis with relevant figures from the adjusted financial information and Cash Flow Summary. Present the analysis in point form, separated using suitable headings for profitability, liquidity, efficiency and solvency.

2. Evaluate how Brew Haven’s current financial position and cash flows may affect its ability to undertake the proposed expansion and take on the additional RM180,000 bank loan. Use the financial evidence to identify the key strengths and potential concerns of the business and explain their relevance to the proposed expansion.

Task 3: Recommendation to the Owner

The Owner plans to obtain an additional RM180,000 bank loan to finance the proposed second café.

1. Based on your analysis, recommend ONE of the following options:

Option A: Proceed with the expansion as planned.

Option B: Delay the expansion until the business’s financial performance improves.

Option C: Do not proceed with the expansion.

Justify your recommendation using evidence from the adjusted net profit, the adjusted Statement of Financial Position, the financial ratios, the Cash Flow Summary, and the business scenario.

2. Suggest TWO practical actions relating to Brew Haven’s profitability, liquidity, efficiency or financing that the business should implement over the next 12 months to support its chosen option. Your suggestions must address the financial strengths or concerns identified in Task 2 and be supported by the financial information.

Experts Answer on Above Questions on Financial Analysis

Determining Brew Haven’s actual profit

Adjustments to be made under accrual accounting – the adjustments are to be made in respect to unrecorded credit sales by increasing RM 8000 which would positively affect the profit, outstanding wages needs to be increased by RM 10000 which will decrease the profit, while the prepaid insurance need adjustments of RM 18000 for 9 months which would also increase the profit. The additional depreciation would be RM20000 and have a negative impact on the profit.
The adjusted net profit is therefore RM156000

Adjusted vs draft profit

The draft net profit was RM160000 and the adjusted net profit is calculated as RM156000 which is a reduction of RM4000. This implies that the profit was overstated in draft profit and this is mainly because RM10000 was omitted out of accrued wages and RM20000 from additional depreciation. However the profit increases from the credit sales of RM8000, and the insurance treatment also adds RM18000, but these are insufficient to offset the additional expenses.

Owner view about the business performance

The owner’s view that the business performed well is true but with some qualification. The profit of RM156000 on RM968000 adjusted revenue indicates that the business of Brew Haven generated profit and thereby giving a 16.12% of net profit margin. But it is also identified from the adjustment that accrual accounting is important because the profit earned before year end is recognised even though the cash will be received later.

Financial performance and position

Profitability – the gross profit margin of 55.37% indicates that the specialty coffee of the cafe, beverages, meals and catering activities generate a significant amount of profit to absorb the operating costs efficiently. The net profit margin of 16.12% also indicates a good percentage of profit earned by the business after making provision for taxation. However with the expansion of the second Cafe, the expenses like additional rent, wages, utilities, depreciation, marketing and financing cost would increase and directly affect the profitability.
Liquidity – With respect to liquidity performance, the current ratio of 4.67:1 and acid test ratio of 3.30:1 indicates sufficient short term liquidity available to meet out the obligations of the company.
Efficiency – From an efficiency point of view, the inventory turnover ratio of 47.3 days suggests that inventory is held for approximately 47 days before they are being converted into the same. The receivable turnover ratio is 13.6 days which shows that the payments are collected from customers in 13 days approximately.
Solvency – The interest coverage ratio is 14 times which implies that EBIT covers existing interest expense 14 times. But the proposed loan of RM180000 would increase the total bank borrowing to RM330000 which indicates that the future interest obligations would increase.

Effect of cash flow on expansion

The operating cash flow of RM 180000 suggests that the business is generating a substantial amount of cash internally while the investing cash flow of RM 120000 shows that Brew Haven has made significant commitment of cash to investment. The financing cash flow of RM30000 indicates that the financing activities have contributed significantly during the year in increasing the cash, and the closing cash balance of RM 150000 shows that the business has sufficient cash in hand.
The main concern for the company is the proposed expansion which requires additional capital of RM 180000 but the balance shows that the business has significant equity supporting its assets.

Recommendations

It is recommended to proceed with the expansion as planned because the net profit margin is good enough along with supportive operating cash flow to manage the operations. The liquidity position is excellent and there is significant increase in the demand during 2026 which supports the expansion plan.

Two practical actions for the next 12 months

It is important to improve the working capital and inventory control, as efficiency in these areas would help in funding the second Cafe’s early operating expenses effectively, and secondly, establish a debt-service and expansion cash reserve.

Want Detailed Answers with References?

The analysis of the Brew Haven adjusted profit, financial ratios, cash flows and expansion loan to evaluate whether the second cafe expansion is effective indicates that the business has a strong profitability, liquidity and operational performance which supports the expansion plan. With our accounting assignment experts in Malaysia, you can get a similar kind of analysis for your assignments. Simply visit our assignment help page in Malaysia to get a professional helper for your assignment. Also access the solved assignment answers from Monash University Malaysia or check experts written accounting assignment answers to determine writers’ capabilities.