Continue Case Chatper 13

Continuing Cookie Chronicle 13 d-f (Essay)

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 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

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.

2020 2019 

1. Current ratio 0.80 :1 0.57 :1

2. Debt to assets 47 % 43 %

3. Gross profit rate 54 % 55 %

4. Profit margin 7.6 % 9.1 %

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

36.2 % 69.2 %

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).

46.1 % 84.8 %

COOKIE & COFFEE CREATIONS INC.

Income Statement

Year Ended October 31

Horizontal Analysis

Sales 5 %

Cost of goods sold 7 %

Gross profit 3 %

Operating expenses   

     Salaries and wages expense 1 %

     Depreciation expense 93 %

     Other operating expenses 12 %

       Total operating expenses 8 %

Income from operations -12 %

Other expenses   

     Interest expense   

     Loss on disposal of plant assets   

      Total other expenses   

Income before income tax -17 %

Income tax expense -34 %

Net income -12 %

COOKIE & COFFEE CREATIONS INC.

Income Statement

Year Ended October 31

2020

Vertical Analysis 2019

Vertical Analysis 

Sales 100.00 % 100.00 % 

Cost of goods sold 45.86 % 45.00 % 

Gross profit 54.14 % 55.00 % 

Operating expenses         

     Salaries and wages expense 30.47 % 31.64 % 

     Depreciation expense 3.62 % 1.97 % 

     Other operating expenses 9.92 % 9.28 % 

       Total operating expenses 44.02 % 42.89 % 

Income from operations 10.12 % 12.11 % 

Other expenses         

     Interest expense 0.09 % 0.00 % 

     Loss on disposal of plant assets 0.51 % 0.00 % 

      Total other expenses 0.60 % 0.00 % 

Income before income tax 9.52 % 12.11 % 

Income tax expense 1.90 % 3.03 % 

Net income 7.62 % 9.08 % 

Comment on your findings.

What would justify a decision by Cookie & Coffee Creations Inc. to buy the additional equipment? What alternatives are there instead of bank financing?