The balance sheet and income statement of Cookie & Coffee Creations Inc. for its first
year of operations, the year ended October 31, 2013, follows.
COOKIE & COFFEE CREATIONS INC.
Balance Sheet
October 31, 2013
Assets
Current assets
Cash $32,219
Accounts receivable 3,250
Merchandise Inventory 17,897
Prepaid expenses 6,300 $ 59,666
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 83,000
Accumulated depreciation”kitchen equipment 8,000 75,000 89,850
Total assets $149,516
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $ 5,848
Income tax payable 18,500
Dividends payable 700
Salaries payable 2,250
Interest payable 188
Note payable”current portion 4,000 $ 31,486
Long-term liabilities
Note payable”long-term portion 6,000
Total liabilities 37,486
Stockholders’ equity
Paid-in capital
Preferred stock, 2,800 shares issued $14,000
Common stock, 25,930 shares issued,
25,180 outstanding 25,930 39,930
Retained earnings 72,600
Total paid-in capital and retained earnings 112,530
Less:Treasury stock”common (750 shares),
at cost (500)
Total stockholders’ equity 112,030
Total liabilities and stockholders’ equity $149,516
COOKIE & COFFEE CREATIONS INC.
Income Statement
Year Ended October 31, 2014
Sales revenue $462,500
Cost of goods sold 231,250
Gross profit 231,250
Operating expenses
Salaries and wages expense $92,500
Depreciation expense 9,850
Other operating expenses 35,987 138,337
Income from operations 92,913
Other expenses
Interest expense 413
Income before income tax 92,500
Income tax expense 18,500
Net income $ 74,000
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 semiannual installment payments of $2,500 on May 1 and November 1 of each year, plus
interest of 5% on the outstanding balance. Dividends on preferred stock were $1,250. Since this
is the first year of operations and the beginning balances are zero, use the ending balance as the
average balance where appropriate.
Instructions
(a) Calculate the following ratios.
1. Current ratio 6. Gross profit rate
2. Receivables turnover 7. Profit margin
3. Inventory turnover 8. Asset turnover
4. Debt to total assets 9. Return on assets
5. Times interest earned 10. Return on common stockholders’ equity
(b) Comment on your findings from part (a).
(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?