Question
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.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started