Continuing Cookie Chronicle

Continuing Cookie Chronicle 1

Continuing Cookie Chronicle

(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 12.)

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?

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