The balance sheet and income statement of Cookie & Coffee Creations Inc. for its first

year of operations, the year ended October 31, 2013, follows.


Balance Sheet

October 31, 2013


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


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.


(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?