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COOKIE & COFFEE CREATIONS INC.

COOKIE & COFFEE CREATIONS INC.

Balance Sheet
October 31
Assets 2008 2007
Cash $ 34,324 $13,050
Accounts receivable 3,250 2,710
Inventory 7,897 7,450
Prepaid expenses 6,300 6,050
Equipment 96,500 75,500
Accumulated depreciation (25,200) (9,100)
Total assets $123,071 $95,660
Liabilities and Stockholders' Equity
Accounts payable $ 3,650 $ 2,450
Income taxes payable 10,251 11,200
Dividends payable 28,000 25,000
Salaries payable 2,250 1,280
Interest payable 188 0
Note payable?current portion 3,000 0
Note payable?long-term portion 4,500 0
Preferred stock, no par, $6 cumulative?3,000 and 2,500 shares
issued, respectively 15,000 12,500
Common stock, $1 par?23,180 shares issued 23,180 23,180
Additional paid in capital?Treasury stock 250 250
Retained earnings 32,802 19,800
Total liabilities and stockholders' equity $123,071 $95,660

COOKIE & COFFEE CREATIONS INC.
Income Statement
Year Ended October 31
2008 2007
Sales $485,625 $462,500
Cost of goods sold 222,694 208,125
Gross profit 262,931 254,375
Operating expenses
Depreciation expense 17,850 9,100
Salaries and wages expense 147,979 146,350
Other operating expenses 43,186 42,925
Total operating expenses 209,015 198,375
Income from operations 53,916 56,000
Other expenses
Interest expense 413 0
Loss on sale of computer equipment 2,250 0
Total other expenses 2,663 0
Income before income tax 51,253 56,000
Income tax expense 10,251 11,200
Net income $ 41,002 $ 44,800
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 2007 and 2008.
1. Current ratio
2. Debt to total assets
3. Gross profit rate
4. Profit margin
5. Return on assets (Total assets at November 1, 2006, were $33,180.)
6. Return on common stockholders' equity (Total common stockholder's equity at November
1, 2006, was $23,180.)
7. Payout ratio
(b) Prepare a horizontal analysis of the income statement for Cookie & Coffee Creations Inc.
using 2007 as a base year.
(c) Prepare a vertical analysis of the income statement for Cookie & Coffee Creations Inc. for
2008 and 2007.
(d) Comment on your findings from parts (a) to (c).
(e) What impact would borrowing an additional $15,000 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?

Solution Preview

COOKIE & COFFEE CREATIONS INC.
Balance Sheet

October 31

Assets 2008 2007
Cash $ 34,324 $13,050
Accounts receivable 3,250 2,710
Inventory 7,897 7,450
Prepaid expenses 6,300 6,050
Total current assets 51,771 29,260
Equipment 96,500 75,500
Accumulated depreciation (25,200) (9,100)
Total assets $123,071 $95,660

Liabilities and Stockholders' Equity
Accounts payable $ 3,650 $ 2,450
Income taxes payable 10,251 11,200
Dividends payable 28,000 25,000
Salaries payable 2,250 1,280
Interest payable 188 0
Note payable?current portion 3,000 0
Total current liabilities 47,339 39,930
Note payable?long-term portion 4,500

Preferred stock, no par, $6 cumulative?3,000 and 2,500 shares
issued, respectively 15,000 12,500
Common stock, $1 par?23,180
shares issued 23,180 23,180

Additional paid in capital?
Treasury stock 250 250
Retained earnings 32,802 19,800
Total liabilities and stockholders' equity $123,071 $95,660

COOKIE & COFFEE CREATIONS INC.
Income Statement

Year Ended October 31

2008 2007

Sales $485,625 $462,500
Cost of goods sold 222,694 208,125
Gross profit 262,931 254,375
Operating expenses
Depreciation expense 17,850 9,100
Salaries and wages expense 147,979 146,350
Other operating expenses 43,186 42,925
Total operating expenses 209,015 198,375
Income from operations 53,916 56,000
Other expenses
Interest expense 413 0
Loss on sale of computer equipment 2,250 0
Total other expenses 2,663 0
Income before income tax 51,253 56,000
Income tax expense 10,251 11,200
Net income $ 41,002 $44,800

Additional information:
Natalie and Curtis are thinking about borrowing an ...

Solution Summary

This solution is comprised of a detailed explanation to answer the followings: -
(a) Calculate the following ratios for 2007 and 2008.
1. Current ratio
2. Debt to total assets
3. Gross profit rate
4. Profit margin
5. Return on assets (Total assets at November 1, 2006, were $33,180.)
6. Return on common stockholders' equity (Total common stockholder's equity at November
1, 2006, was $23,180.)
7. Payout ratio
(b) Prepare a horizontal analysis of the income statement for Cookie & Coffee Creations Inc.
using 2007 as a base year.
(c) Prepare a vertical analysis of the income statement for Cookie & Coffee Creations Inc. for
2008 and 2007.
(d) Comment on your findings from parts (a) to (c).
(e) What impact would borrowing an additional $15,000 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?

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