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The comparative balance sheet of Cookie & Coffee Creations Inc. at October 31, 2020 for the years 2020 and 2019, and the income statements for

The comparative balance sheet of Cookie & Coffee Creations Inc. at October 31, 2020 for the years 2020 and 2019, and the income statements for the years ended October 31, 2019 and 2020, are presented below.

COOKIE & COFFEE CREATIONS INC.

Balance Sheet

October 31

Assets

2020

2019

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 payablecurrent portion

4,000

0

Note payablelong-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 par25,180

shares issued

25,180

25,180

Additional paid in capitaltreasury 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

2020

2019

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 2019 and 2020.

1. Current ratio

2. Debt to assets

3. Gross profit rate

4. Profit margin

5. Return on assets (Total assets at November 1, 2018, were $33,180.)

6. Return on common stockholders equity (Total common stockholders equity at November 1, 2018, was $23,180. Dividends on preferred stock were $16,800 in 2019 and $18,000 in 2020).

7. Comment your findings from 1-6

8. 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.

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