The comparative balance sheet of Cookie & Coffee CreationsInc. at October 31, 2020 for the years 2020 and 2019, and theincome 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 repaidover a 4-year period. The terms of the loan provide for equalsemi-annual payments of $2,500 on May 1 and November 1 of eachyear, plus interest of 5% on the outstanding balance.
1. Prepare a horizontal analysis of the income statementfor Cookie & Coffee Creations Inc. using 2019 as a base year.Also, prepare a vertical analysis of the income statement forCookie & Coffee Creations Inc. for 2020 and 2019.
2. Comment your findings.
3. What would justify a decision by Cookie & CoffeeCreations Inc. to buy the additional equipment? What alternativesare there instead of bank financing?
