CCC13 The comparative balance sheet of Cookie & Coffee Creations Inc

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CCC13 The comparative balance sheet of Cookie & Coffee Creations Inc. at October 31, 2018 for the years 2018 and 2017, and the income statements for the years ended October 31, 2017 and 2018, are presented below.

COOKIE & COFFEE CREATIONS INC.

Balance Sheet

October 31

Assets		2018		2017
Cash		$  22,324		$  5,550
Accounts receivable		3,250		2,710
Inventory		7,897		7,450
Prepaid expenses		5,800		6,050
Equipment		102,000		75,500
Accumulated depreciation		(25,200)		(9,100)
Total assets		$116,071		$88,160
Liabilities and Stockholders’ Equity
Accounts payable	$  1,150		$  2,450
Income taxes payable	9,251		7,200
Dividends payable	27,000		27,000
Salaries and wages payable	7,250		1,280
Interest payable	188		0
Note payable—current portion	4,000		0
Note payable—long-term portion	6,000		0
Preferred stock, no par, $6 cumulative—
3,000 and 2,800 shares issued,
respectively	15,000		14,000
Common stock, $1 par—25,180
shares issued	25,180		25,180
Additional paid in capital—treasury stock	250		250
Retained earnings	20,802		10,800
Total liabilities and stockholders’ equity	$116,071		$88,160

COOKIE & COFFEE CREATIONS INC.

Income Statement

Year Ended October 31

 

	2018		2017
Sales	$485,625		$462,500
Cost of goods sold	222,694		208,125
Gross profit	262,931		254,375
Operating expenses   Salaries and wages expense	147,979		146,350
Depreciation expense	17,600		9,100
Other operating expenses	48,186		42,925
Total operating expenses	213,765		198,375
Income from operations	49,166		56,000
Other expenses   Interest expense	413		0
Loss on disposal of plant assets	2,500		0
Total other expenses	2,913		0
Income before income tax	46,253		56,000
Income tax expense	9,251		14,000
Net income	$  37,002		$  42,000

 

Additional information:

Natalie and Curtis are thinking about borrowing an additional $20,000 to buy more kitchen equipment. The loan would be repaid over a 4-year period. The terms of the loan provide for equal semi-annual payments of $2,500 on May 1 and November 1 of each year, plus interest of 5% on the outstanding balance.

Instructions

(a)  Calculate the following ratios for 2017 and 2018.

1.  Current ratio

2.  Debt to total assets

3.  Gross profit rate

4.  Profit margin

5.  Return on assets (Total assets at November 1, 2016, were $33,180.)

6.  Return on common stockholders’ equity (Total common stockholders’ equity at November 1, 2016, was $23,180. Dividends on preferred stock were $16,800 in 2017 and $18,000 in 2018).

(b)  Prepare a horizontal analysis of the income statement for Cookie & Coffee Creations Inc. using 2017 as a base year.

(c)  Prepare a vertical analysis of the income statement for Cookie & Coffee Creations Inc. for 2018 and 2017.

(d)  Comment on your findings from parts (a) to (c).

(e)  What impact would borrowing an additional $20,000 to buy more equipment have on each of the ratios in (a) above, assuming that no changes are expected on the income statement and balance sheet? Comment on your findings.

(f)  What would justify a decision by Cookie & Coffee Creations Inc. to buy the additional equipment? What alternatives are there instead of bank financing?