Question

In: Accounting

Selected current year-end financial statements of Cabot Corporation follow. (All sales were on credit; selected balance...

Selected current year-end financial statements of Cabot Corporation follow. (All sales were on credit; selected balance sheet amounts at December 31 of the prior year were inventory, $55,900; total assets, $229,400; common stock, $84,000; and retained earnings, $46,084.)

CABOT CORPORATION
Income Statement
For Current Year Ended December 31
Sales $ 450,600
Cost of goods sold 297,150
Gross profit 153,450
Operating expenses 98,500
Interest expense 4,100
Income before taxes 50,850
Income tax expense 20,484
Net income $ 30,366
CABOT CORPORATION
Balance Sheet
December 31
Assets Liabilities and Equity
Cash $ 18,000 Accounts payable $ 17,500
Short-term investments 9,600 Accrued wages payable 2,800
Accounts receivable, net 30,800 Income taxes payable 3,300
Merchandise inventory 34,150 Long-term note payable, secured by mortgage on plant assets 63,400
Prepaid expenses 2,600 Common stock 84,000
Plant assets, net 152,300 Retained earnings 76,450
Total assets $ 247,450 Total liabilities and equity $ 247,450


Required:
Compute the following: (1) current ratio, (2) acid-test ratio, (3) days' sales uncollected, (4) inventory turnover, (5) days' sales in inventory, (6) debt-to-equity ratio, (7) times interest earned, (8) profit margin ratio, (9) total asset turnover, (10) return on total assets, and (11) return on common stockholders' equity. (Do not round intermediate calculations.)

Solutions

Expert Solution

(1)

Current Ratio

Choose Numerator:

/

Choose Denominator:

=

Current Ratio

Current assets

/

Current liabilities

=

Current Ratio

$95150

/

$23600

=

4.0

to 1

Current Assets = Total assets – Plant assets

           = $247450 - $152300 = $95150

Current liabilities = Accounts payable + accrued wages payable + Income tax payable

        = $17500 + $2800 + $3300 = $23600

(2)

Acid-Test Ratio

Choose Numerator:

/

Choose Denominator:

=

Acid-Test Ratio

Quick assets

/

Current liabilities

=

Acid-Test Ratio

$58400

/

$23600

=

2.5

to 1

Quick assets = Current assets – Prepaid expense – Merchandise inventory

      = $95150 - $2600 - $34150 = $58400

(3)

Days Sales Uncollected

Choose Numerator:

/

Choose Denominator:

x

Days

=

Days Sales Uncollected

Current receivables

/

Net sales

x

365

=

Days Sales Uncollected

$30800

/

$450600

x

365

=

24.9

days

(4)

Inventory Turnover

Choose Numerator:

/

Choose Denominator:

=

Inventory Turnover

Cost of goods sold

/

Average inventory

=

Inventory Turnover

$297150

/

$45025

=

6.6

times

Average Inventory = (Beginning + Ending)/2

    = ($34150 + $55900)/2 = $45025

(5)

Days’ Sales in Inventory

Choose Numerator:

/

Choose Denominator:

x

Days

=

Days’ Sales in Inventory

Merchandise inventory

/

Cost of goods sold

x

365

=

Days’ Sales in Inventory

$34150

/

$297150

x

365

=

41.9

days

(6)

Debt-to-Equity Ratio

Choose Numerator:

/

Choose Denominator:

=

Debt-to-Equity Ratio

Total liabilities

/

Total equity

=

Debt-to-Equity Ratio

$87000

/

$160450

=

0.54

to 1

Total Liabilities = Accounts payable + Accrued wages payable + Income tax payable + Long term note payable

        = $17500 + $2800 + $3300 + $63400 = $87000

Total equity = Common stock + Retained earnings

           = $84000 + $76450 = $160450

(7)

Times Interest Earned

Choose Numerator:

/

Choose Denominator:

=

Times Interest Earned

Income before tax

+

Interest expense

/

Interest expense

=

Times Interest Earned

$50850

+

$4100

/

$4100

=

13.4

times

(8)

Profit Margin Ratio

Choose Numerator:

/

Choose Denominator:

=

Profit margin ratio

Net income

/

Net sales

=

Profit margin ratio

$30366

/

$450600

=

6.7

%

(9)

Total Asset Turnover

Choose Numerator:

/

Choose Denominator:

=

Total Asset Turnover

Net sales

/

Average total assets

=

Total Asset Turnover

$450600

/

$238425

=

1.9

times

Average total assets = (Beginning + Ending)/2

    = ($229400 + $247450)/2 = $238425

(10)

Return on Total Assets

Choose Numerator:

/

Choose Denominator:

=

Return on Total Assets

Net income

/

Average total assets

=

Return on Total Assets

$30366

/

$238425

=

12.7

%

(11)

Return on Common Stockholders' Equity

Choose Numerator:

/

Choose Denominator

=

Return On Common Stockholders' Equity

Net income

-

Preferred dividends

/

Average common stockholders' equity

=

Return On Common Stockholders' Equity

$30366

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