Cookie Creations The balance sheet and income statement of Cookie & Coffee Creations Inc. for its first year of operations, the year ended October 31, 2017, follows.

COOKIE & COFFEE CREATIONS INC. Balance Sheet October 31, 2017

Assets Current assets Cash $86,219

Accounts receivable 3,250

Inventory 17,897

Prepaid expenses 6,300 $113,666

Property, plant, and equipment Furniture and fixtures $12,500

Accumulated depreciation furniture and fixtures (1,250) 11,250

Computer equipment 4,200

Accumulated depreciation computer equipment (600) 3,600

Kitchen equipment 29,000

Accumulated depreciation kitchen equipment (2,050) 26,950 41,800

Total assets $155,466

Liabilities and Stockholders Equity

Current liabilities

Accounts payable $ 5,848

Income tax payable 19,690

Dividends payable 700

Salaries and wages payable 2,250

Interest payable 188

Note payablecurrent portion 4,000 $ 32,676 Long-term liabilities Note payablelong-term portion 6,000

Total liabilities 38,676

Stockholders equity

Paid-in capital

Preferred stock, 2,800 shares issued and outstanding $ 14,000

Common stock, 25,930 shares issued, 25,180 outstanding 25,930 $39,930

Retained earnings 77,360 Total paid-in capital and retained earnings 117,290

Less: Treasury stock (750 common shares) 500 Total stockholders equity 116,790

Total liabilities and stockholders equity $155,466

COOKIE & COFFEE CREATIONS INC.

Income Statement

Year Ended October 31, 2017

Sales revenue $462,500

Cost of goods sold 231,250

Gross profit 231,250

Operating expenses Salaries and wages expense $92,500

Depreciation expense 3,900

Other operating expenses 35,987 $132,387 Income from operations 98,863

Other expenses Interest expense 413

Income before income tax 98,450

Income tax expense 19,690

Net income $ 78,760

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 semiannual installment 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: 1. current ratio 6. gross profit rate 2. accounts receivable turnover 7. profit margin 3. inventory turnover 8. asset turnover 4. debt to assets 9. return on assets 5. times interest earned 10. return on common stockholders equity

(b) Comment on your findings from part

(c) Based on your analysis in parts (a) and (b), do you think a bank would lend Cookie & Coffee Creations Inc. $20,000 to buy the additional equipment? Explain your reasoning.

(d) What alternatives could Cookie & Coffee Creations consider instead of bank financing?

Follow the instructions carefully. You will do some ratio analysis, then decide whether a bank would lend Natalie and Curtis $20,000 to buy equipment for their business. Decide yes or no and substantiate your decision with financial analysis. Note that this is their first year of business so all changes in their financials are a 100% change since they are starting from zero.