The balance sheet and income statement of Cookie & Coffee Creations Inc. for its
ID: 2453961 • Letter: T
Question
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 depreciationfurniture and fixtures 1,250 11,250
Computer equipment 4,200
Accumulated depreciationcomputer equipment 600 3,600
Kitchen equipment 83,000
Accumulated depreciationkitchen 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 payablecurrent portion 4,000 $ 31,486
Long-term liabilities
Note payablelong-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 stockcommon (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?
Explanation / Answer
1)
a) Current ratio= Current assets/ current Liabilities
Current Assets=Cash+ Accounts Receivable+Inventory+Prepaid Expenses
=32219+3250+17897+6300= $59666
Current Liabilities=Accounts Payable+Income Tax Payable+Dividend Payable+Salaries Payable+Interest payable+Note payable=$31486
= 59666/31486=1.895
Gross Profit Rate: Gross Profit/Sales*100=231250/462500*100=50%
Receivable Turnover=Net Credit Sales/Average Accounts Receivable=462500 /3250= 142 times
No information about Net Credit sales given assuming that the sale is net credt sale. But it shows a high turnover
Profit margin= Net Profit/Sales*100=74000/462500*100=16%
Inventory Turnover=COGS/Avg orEnding Inventory= 231250/17897= 12.92 times
Asset Turnover= Net sales/Total assets=462500/149516=3.09
Debt To total asset=Total liabilities(Curren Liabilities+long Term Liabilities)/Total assets37486/149516= .25
Return on Asset= Net Income/Total assets=7 4000/149516*100=49.5%
Times Interest earned= EBIT/Interest payable=92913/413= 225 times
Return on common stockholder Equity= Net Income/Stockholder=74000/112030*100=66.05%
b) According to the ratio analysis
Profitability Ratios. It has high profitablity ratio which tells how well the company is achieving profits from its operationsis. It has profit margin of 16%, Gross profit margin of 50%, ROA 49.5%,ROE 66.05%. This shows company is doing well
It has optimum current asset ratio which tells the ability of the company to pay off its current liabilities as they become due.
It has also very good Interest coverage ratio which tell that how many times the company is able to pay interest.
Efficency Ratio:It is how well the company utilizes thier assets to generate income. Inventory turnover is12.92, asset turnover is 3.09 which is really good.
Solvency ratio: it has good debt to asset ratio which tells how solvent the company is and have ability to sustain operations in future. It is .25 the lower it is the better it is.
c) The bank will provide loan as the company is sound in all the aspects.
d) We already have surplus so that can be utilized.
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