Answered: Natalie and Curtis have comparative…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Natalie and Curtis have comparative balance sheets and income statements for Cookie & Coffee Creations, Inc. They have been told that they can use these financial statements to prepare horizontal and vertical analyses, to calculate financial ratios, to analyze how their business is doing, and to make some decisions they have been considering. Below, you are provided with the balance sheet and income statement of Cookie & Coffee Creations Inc. for its first year of operations; the year ended October 31, 2021. Review the calculations below, and then review the additional case information to calculate the ratios.

Review the additional case information below.

Natalie and Curtis are thinking about borrowing an additional $20,000 to buy more 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 $1,400. Since this is the first year of operations and the beginning balances are zero, use the ending balance as the average balance where appropriate.

Complete the tasks listed below.

Calculate the following ratios:

current ratio,
accounts receivable turnover,
inventory turnover,
debt to assets ratio,
times interest earned,
gross profit rate,
profit margin,
asset turnover,
return on assets, and
return on common stockholders' equity.

Comment on your findings from item “a.”
Based on your analysis in items “a” and “b”, do you think a bank would lend Cookie & Coffee Creations Inc. $20,000 to buy the additional equipment? Explain your reasoning.

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