Continuing Cookie Chronicle
Continuing Cookie Chronicle
(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through
12.)
CCC13 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.
Balance Sheet
October 31
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
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.
Instructions
(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?
(a)
2018
2017
1.
Current ratio
2.
Debt to total assets
3.
Gross profit rate
4.
Profit margin
5.
Return on assets
6.
Return on common stockholders’
equity
(b)
COOKIE & COFFEE CREATIONS INC.
Income Statement
For The Year Ended October 31
2018
2017
Differen
ce
Horizont
al
Analysis
Sales
Cost of goods sold
Gross profit
Total other expenses
Income before income tax
Income tax expense
Net income
$485,62
5
2,500
$462,5
00
56,000
$23,12
5
413
2,500
5%
7%
3%
(c)
COOKIE & COFFEE CREATIONS INC.
Income Statement
For The Year Ended October 31
2018
Vertical
Analysis
2017
Vertical
Analysis
Sales
Cost of goods sold
Total other expenses
Income before income tax
Income tax expense
Net income
$485,625
222,694
100.00
%
0.09%
$462,50
0
—
—
100.00%
45.00%
(d) Sales have increased by 5% from 2017 to 2018; however the cost of
goods sold increased by 7%. This resulted in a decrease in gross
Depreciation has increased by 93%; however, this represents signifi–
cant increases in the purchase of plant assets during 2017 and 2018.
The debt to total assets ratio has increased slightly from 43% to 47%.
(e) The impact on borrowing an additional $20,000:
Current ratio would decline slightly.
Profit margin—Interest expense (less the related tax savings) would
cause profits to decline.
(f) The justification for the purchase of the additional equipment would
be the related increase in sales revenue. In this case, Cookie & Coffee