Anneika Lafferty and her friend Bernie Williams started an Internet business 15 months ago selling affordable musical instruments for beginners. They named it A&B Musical Instruments. Because they live near each other, Bernie keeps the inventory in his garage and Anneika has the computer system, phones, and office space in her home. Business has not done as well as they expected, but they are still optimistic. They have learned from their mistakes and realize that their products are not as popular as expected. They would like to sell the business and create a different type of online business. A larger Internet music company wants to buy them but the $50,000 offered is not nearly what Anneika and Bernie expected, based on the company's potential. They quickly reject the offer. The offer is based on last year's balance sheet, shown below, and the income statement, which showed $175,000 in sales and $110,000 in expenses. Many of the expenditures were to get the business started.

1. On what basis did the potential buyer probably make the $50,000 offer? What did the buyer learn from the sellers' rejection?
2. How might the working capital, current ratio, and return on sales have affected the offering price? Prepare the necessary calculations before answering.
3. Assume you wish to buy the company. What additional information would you want to gather from the sellers?

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A & B Musical Instruments Balance Sheet December 31, 20- Liabilities and Capital ssets Cash Accounts Receivable Inventory Equipment $9,000 Liabilities: 8,000 37,000 25,000 To Liabilities Accounts Payable $31,000 31,000 24,000 Capital A. Lafferty B. Williams 24,000 Total Liabilities & Total Assets $79,000 Capital $79,000