Melissa Parker is considering the merits of buying a small caf in Adelaide. The caf is fully furnished and equipped. The business has been operating for the last 3 years.The caf 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% owners 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?