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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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