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 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.
Required:
(a) Calculate the following ratios:
1. Current ratio
2. Receivables turnover
3. Inventory turnover
4. Debt to total assets
5. Times interest earned
6. Gross profit rate
7. Profit margin
8. Asset turnover
9. Return on assets
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?

(a) Ratios:

1. Current ratio  

= Current Assets/Current Liabilities

= $113,666/ $ 32,676

= 3.48

2. Receivables turnover  

= Net Sales/Average Accounts Receivable

= $462,500/3,250

= 142.31

3. Inventory turnover  

= Cost of goods sold/Average Inventory

= $231,250/17,897

= 12.92

4. Debt to total assets  Ratio

= Total Debts/Total Assets * 100

= $38,676/$155,466 * 100

= 25%

5. Times interest earned

= EBIT/Interest Expense

= $98,863/413

= 239.38

6. Gross profit rate

= Gross profit/Sales * 100

= $231,250/462,500 * 100

= 0.5

= 50%

7. Profit margin

= Net Income/Sales * 100

= $78760/462,500 * 100

= 0.17

= 17%

8. Asset turnover

= Sales/Average Assets

= $462,500/155,466

= 2.97

9. Return on assets

= Net Income/Assets * 100

= $78,760/155,466 * 100

= 50.66%

10. Return on common stockholders' equity

= Net Income/Stockholders' Equity * 100

= $78,760/116,790 * 100

= 67.44%

(b) Comment on your findings from part (a).

1. Current ratio : This ratio shows CCC INC.'s ability to settle its current liabilities or financial obligations from its current assets.  The company can comfortably settle its current financial obligations 3.48 times without borrowing.  It only needs to manage its working capital well so that it does not run out of cash.

2. Receivables turnover :  This ratio shows CCC INC.'s ability to collect its accounts receivable.  It does not take long for CCC INC. to receive cash from credit customers.  When the receivables turnover of 142.31 is divided into 365 days, we find that it takes only 2.6 days to collect from customers.  This is very good.

3. Inventory turnover :  This ratio shows how many times the company turns over its inventories.  Its inventory is turned 12.92 times in a year.

4. Debt to total assets  Ratio: This ratio shows the company's debts are only 25% of the total assets.  The remaining 75% of the assets are contributed by equity.  The company can still take on more debts when necessary.

5. Times interest earned :  The interest expense is covered 239 times by the EBIT.  This shows the company can settle its interest expense from current earnings.

6. Gross profit rate : This ratio shows the ability of the management to manage the cost of goods sold relative to the net sales.  The gross profit represents 50% of the sales.

7. Profit margin : The profit ratio or margin ratio shows the ability of the managers to ensure that operating expenses do not consume the sales revenue.  They could only preserve 17% of the sales revenue for the owners after expenses and income taxes.

8. Asset turnover : The company generated 2.97 times of the assets it used for operations.  This looks good and sound.

9. Return on assets : What is the return made from the assets?  This ratio shows that CCC INC. generates 50.66% net income on each of the assets it has deployed in operations.

10. Return on common stockholders' equity : The company generates 67.44% returns for the stockholders.

(c) The company does not need to borrow $20,000 from any bank with so much in cash.

(d) Alternatives to bank financing:

The company can self-finance equipment worth $20,000 and even invest its idle cash into some marketable securities.

Explanation:

a) Data:

Balance Sheet October 31, 2017

Assets

Current assets

Cash                                         $86,219

Accounts receivable                   3,250

Inventory                                    17,897

Prepaid expenses                      6,300               $113,666

Property, plant, and equipment

  Furniture and fixtures         $12,500

Accumulated depreciation—

  Furniture and fixtures            (1,250) 11,250

Computer equipment               4,200

Accumulated depreciation—

 computer equipment               (600) 3,600

Kitchen equipment                29,000

Accumulated depreciation—

 kitchen equipment               (2,050) 26,950        41,800

Total assets                                                         $155,466

Liabilities and Stockholders’ Equity

Current liabilities

Accounts payable                   $ 5,848

Income tax payable                  19,690

Dividends payable                        700

Salaries and wages payable     2,250

Interest payable                             188

Note payable—current portion 4,000                $ 32,676

Long-term liabilities Note payable—

 long-term portion                                                  6,000

Total liabilities                                                      $38,676

Stockholders’ equity :

Paid-in capital

Preferred stock, 2,800 shares issued and

  outstanding                                      $ 14,000

Common stock, 25,930 shares issued,

  25,180 outstanding                           25,930   $39,930

Retained earnings                                                 77,360

Total paid-in capital and retained earnings        117,290

Less: Treasury stock (750 common shares)          (500)

Total stockholders’ equity                                   116,790

Total liabilities and stockholders’ equity         $155,466

Income Statement

Year Ended October 31, 2017

Sales revenue                                        $462,500

Cost of goods sold                                   231,250

Gross profit                                               231,250

Operating expenses

Salaries and wages expense $92,500

Depreciation expense                 3,900

Other operating expenses       35,987 $132,387

Income from operations                           98,863

Other expenses Interest expense                 413

Income before income tax                       98,450

Income tax expense                                  19,690

Net income                                             $ 78,760

Dividends for preferred stock                     1,250

Dividends for common stock                         150

Retained earnings                                  $ 77,360

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