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    COOKIE & COFFEE CREATIONS INC.

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    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?

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    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?

    $2.19