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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