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.
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
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.
(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?