YUMMYCAKES CASE You have decided to invest in two cupcake shops in Paris. You have two friends (Petey and Mamie) who recently graduated from culinary school. Each friend will run one of the shops. Each will have full discretion over establishing and managing the businesses. On January 1, 2021, you gave each friend 50,000 to start the businesses at the beginning of 2020 in exchange for 10,000 shares of common stock. Petey and Mamie have each agreed to receive a starting salary of 40,000 per year. Petey decided to focus on selling cupcakes directly to customers, so he opened a bakery and retail store in the 5th Arrondissement of Paris. On January 1, 2021, he purchased equipment for 21,000 and furniture for 11,000. At that time, he also purchased a store for 500,000. He paid 10,000 in cash and borrowed the remaining 490,000 from a bank. The bank loan has an interest rate of 6 percent a year. Petey pays interest on the 10th of the month for the previous month's interest but will pay no principal until January 1, 2031, when the loan is due in full. Although the loan is for 10 years, Petey expects to use the building for at least 30 years. Mamie decided to focus on selling cupcakes to restaurants and corporations, so she rented baking and office space in the 20th Arrondissement of Paris on January 1, 2021. She purchased equipment for 15,000 and a delivery truck for 30,000. In early January 2022, you flew to Paris from your home in the United States to meet with Petey and Mamie and discuss the results of your investments. Petey said: Business has been good. Customers come in and pay cash when they purchase the cupcakes. This year I collected 430,000 in cash from my customers. (Like many retail businesses, Petey considers credit cards from customers the same as cash because credit card companies transfer cash to the business within a few days of the transaction.) Throughout the year, I've purchased and received 280,000 in baking inventory for the shop from various vendors. I pay cash when I purchase these items. I try to buy just what I need, so I only have about 1000 of unused inventory in the shop at any point in time. The shop is working out great and the customers love it. However, there has been more wear and tear on the furniture than I expected, so it will probably only last one more year. Fortunately, the equipment I purchased is probably good for another three years. Petey continued: The bank loan isn't due until 2031 and I've been keeping current with the monthly interest payments of 2,450. I'll be paying December's interest in the next few days. Also, I recently wrote you a dividend check for 5,000. As we agreed, I received a salary of 40,000 for the year. Currently, I have 86,050 in the bank. Mamie spoke next: I've focused on selling to restaurants and corporations on credit, so they pay me later. I typically collect money within 30 days of making the sale. This year I sold 710,000 of merchandise; however, as of year-end, I've only collected 635,000 of this amount and my customers still owe me the remainder. With the state of the current economy, I'm afraid I won't be able to collect up to 10,000 of what my customers still owe me. Throughout the year, I've also purchased baking inventory for the shop from various vendors. To receive quantity discounts and purchase the ingredients for a slightly lower price, I purchase more at a time. This year I purchased and received 605,000 of inventory. My vendors let me buy on credit and then pay them later. Thus, I still owe my vendors 40,000. Currently, I have about 10,000 of inventory that I haven't used that is at the bakery. Mamie continued: Business has been strong and I've been selling to a variety of places. I've put more miles on the delivery truck than I expected to, so it will only last another three years. I will probably need to replace the equipment after another two years. I've found a great location for my baking and office space, which I rent for only 1,500 a month. However, to get that low rent, I had to sign a three-year lease and must pay three months of rent at a time. At the end of December, I paid the landlord for rent through March 2022. Since the location is great and the rental rate is good, I didn't mind signing the three-year lease and having to pay rent in advance. I've also paid myself the 40,000 salary as we agreed. I currently have 12,500 in the bank. You told your friends that it seemed as though both businesses were doing well and you were happy with your investments. After they left, you begin to think about the cash you originally gave each of them and how each performed. "Yes," you think, "they both did well. Mamie received more cash from customers, but Petey has more cash in the bank. So, who did better?"