Answer according to given case study
Show the income statements for the three candidates to two or three friends who are majoring in business. Ask them to select the best CEO from among these three people on the basis of these income statements. In addi- tion, ask your friends to explain their choices to you. Did your friends choose the same candidate? if not, what do you think caused the differences in their choices? Based on material presented in this chapter, earler chapters in this book, and your general business knowl edge, where would you go to find information about the growth of the different segments of the restaurant industry? Where would you go to find information about the profitability af the restaurant industry in general? What would have been the approprate financial infor- mation to request from the three candidates for the job? What are the three most important insights you gained from studying this feature? Which of these insights Surprised you, and why?
just one is illustrated in this chapter's "Savvy Entrepreneurial Firm" feature. Balance Sheet Unlike the income statement, which covers a specified period of time, a balance sheet is a snapshot of a company's assets, liabilities, and owners' equity at a specific point in time. The left-hand side of a balance sheet (or the top, depending on how it is displayed) shows a firm's assets, while the right-hand side (or bottom) shows its liabilities and owners' equity. The assets are listed in order of their "liquidity," or the length of time it takes to LEARNING OBJECTIVE 5. Explain the purpose of a balance sheet 262 PART 3 MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM SAVVY ENTREPRENEURIAL FIRM Know the Facts Behind the Numbers et's say that New Venture Fitness Drinks was inter- ested in hiring a new chief executive officer (CEO) Land was interviewing the CEOs of three small restau- rant chains. To get a sense of how savvy each candidate was at managing a firm's finances, the board of directors Candidate 1: CEO of New Venture Soup and Salad of New Venture Fitness Drinks asked each person to submit the 2011 income statement for his or her current firm. An analysis of an abbreviated version of each firm's income statement is shown here. Candidate 2: CEO of New Venture Beef Candidate 3: CEO of New Venture Sea Food Net sales $326,400 $281,200 $486,700 Cost of sales 150,500 143,900 174,700 312.000 137,300 175,900 114.200 112,400 150,000 Gross profit All expenses, including taxes and depreciation Net income 61,700 24.900 162.000 value. The company also participated in several volun- teer efforts in its local community to raise the visibility of its restaurants in a positive manner. If the CEO of New Venture Beef hadn't moved quickly to take these actions, its 2011 performance would have been much worse. Ultimately. New Venture Fitness Drinks decided that candidate 2, the CEO of New Venture Beef, was the best candidate for its job. This example illustrates the need to look at multiple years of an income statement rather than a single year to fairly assess how well a firm is performing financially. It also illustrates the need to look beyond the numbers and understand the circumstances that surround a firm's financial results. By glancing at these statements, would appear that the shrewdest financial manager of the three is the CEO of New Venture Sea Food. The company's net income is more than double that of the other two firms. In addition, New Venture Sea Food's cost of sales was 35.9 percent of net sales in 2011, compared to 46.1 percent for New Venture Soup and Salad and 51 percent for New Venture Beet. Similarly, New Venture Sea Food's expenses were 30.9 percent of sales, compared to 35.0 percent for New Venture Soup and Salad and 40 percent for New Venture Beef. Fortunately, one of the board members of New Venture Fitness Drinks asked a series of questions during the personal interviews of the candidates and uncovered some revealing information. As it turns out, New Venture Sea Food was in the hottest segment of the restaurant Industry in 2011. Seafood restaurants of comparable size produced about 1.5 times as much net income as New Venture Sea Food did. So if candidate 3 had done his job properly, his company's net income should have been in the neighborhood of $240,000 instead of $162,000. New Venture Soup and Salad was in a slow-growth area and at midyear feared that it might not meet its financial targets. So the CEO pulled several of his best people off projects and reassigned them to marketing to develop new menu items. In other words, the company borrowed from its future to make its numbers work today. As for New Venture Beef, the CEO found herself in a market that was losing appeal. Several reports that gained national publicity were published early in the year warning consumers of the risks of eating red meat. To compensate, the CEO quickly implemented a producti- vity improvement program and partnered with a local beef promotion board to counter the bad press with more objective research results about beef's nutritional Questions for Critical Thinking 1. Show the income statements for the three candidates to two or three friends who are majoring in business. Ask them to select the best CEO from among these three people on the basis of these income statements. In addi- tion, ask your friends to explain their choices to you. Did your friends choose the same candidate? if not, what do you think caused the differences in their choices? 2. Based on material presented in this chapter, earlier chapters in this book, and your general business knowl- edge, where would you go to find information about the growth of the different segments of the restaurant industry? Where would you go to find information about the profitability of the restaurant industry in general? 3. What would have been the appropriate financial infor- mation to request from the three candidates for the job? 4. What are the three most important insights you gained from studying this feature? Which of these insights surprised you, and why? CHAPTER & ASSESSING A NEW VENTURE'S FINANCIAL STRENGTH AND VIABILITY 263 convert them to cash. The liabilities are listed in the order in which they must be paid. A balance sheet must always "balance," meaning that a firm's assets must always equal its liabilities plus owners' equity.14 The major categories of assets listed on a balance sheet are the following: Current assets: Current assets include cash plus items that are readily convertible to cash, such as accounts receivable, marketable securities
