Question

Selected year-end financial statements of Cabot Corporation follow. (All sales were on credit; selected balance sheet amounts at December 31, 2016, were inventory, $55,900; total assets, $249,400; common stock, $87,000; and retained earnings, $40,778.) CABOT CORPORATION Income Statement For Year Ended December 31, 2017 Sales $ 453,600 Cost of goods sold 297,750 Gross profit 155,850 Operating expenses 99,000 Interest expense 4,900 Income before taxes 51,950 Income taxes 20,928 Net income $ 31,022 CABOT CORPORATION Balance Sheet December 31, 2017 Assets Liabilities and Equity Cash $ 14,000 Accounts payable $ 17,500 Short-term investments 9,000 Accrued wages payable 3,600 Accounts receivable, net 34,000 Income taxes payable 4,400 Notes receivable (trade)* 5,500 Merchandise inventory 40,150 Long-term note payable, secured by mortgage on plant assets 70,400 Prepaid expenses 2,750 Common stock 87,000 Plant assets, net 149,300 Retained earnings 71,800 Total assets $ 254,700 Total liabilities and equity $ 254,700 * These are short-term notes receivable arising from customer (trade) sales. 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.)

Answer 1

1.

Current Ratio

Current Assets

/

Current Liabilities

=

Current Ratio

$105,400

/

$25,500

=

4.13 : 1

Note: Current Assets = Cash + short-term investments + accounts receivable (net) + notes receivable (trade) + merchandise inventory + prepaid expenses = $(14,000 + 9,000 + 34,000 + 5,500 + 40,150 + 2,750) = $105,400 Current Liabilities = Accounts payable + accrued wages payable + income taxes payable = $(17,500 + 3,600 + 4,400) = $25,500

2.

Acid-test Ratio

Quick Assets

/

Current Liabilities

=

Acid-test Ratio

$62,500

/

$25,500

=

2.45 : 1

Note: Quick Assets = Current Assets – Merchandise Inventory – Prepaid Expenses = $(105,400 – 40,150 – 2,750) = $62,500

3.

Days Sales Uncollected

Receivables

/

Net Sales

x

Days in a year

=

Days Sales Uncollected

$39,500

/

$453,600

x

365

=

31.78 days

Note: Receivables = Accounts receivable (net) + Notes receivable(trade) = $(34,000 + 5,500) = $39,500

4.

Inventory Turnover

Cost of Goods Sold

/

Average Inventory

=

Inventory Turnover

$297,750

/

$48,025

=

6.19 times

Note: Average Inventory =( Inventory as on 31/12/16 + Inventory as on 3/12/2017) / 2 = ($55,900 + $40,150) / 2 = $48,025

5.

Days Sales in Inventory

Merchandise Inventory

/

Cost of Goods sold

x

Days in a year

=

Days Sales in Inventory

$40,150

/

$297,750

x

365

=

49.21 days

6.

Debt-to-Equity Ratio

Total Liabilities

/

Total Equity

=

Debt-to-Equity Ratio

$95,900

/

$158,800

=

0.60 : 1

Total Liabilities = Accounts payable + accrued wages payable + income taxes payable + Long-term note payable = $(17,500 + 3,600 + 4,400 + 70,400) = $95,900 Total Equity = Common Stock + Retained Earnings = $(87,000 + 71,800) = $158,800

7.

Times Interest Earned

Income before tax

+

Interest Expense

/

Interest Expense

=

Times Interest Earned

$51,950

+

$4,900

/

$4,900

=

11.60 times

8.

Profit Margin Ratio

Net Income

/

Net Sales

=

Profit Margin Ratio

$31,022

/

$453,600

=

6.83%

9.

Total Asset Turnover Ratio

Net Sales

/

Average Total Assets

=

Total Assets Turnover Ratio

$453,600

/

$252,050

=

1.79 times

Average Total Assets =( Total Assets as on 31/12/16 + Total Assets as on 3/12/2017) / 2 = $(249,400 + 254,700)/2 = $252,050

10.

Return on Total Asset Ratio

Net Income

/

Average Total Assets

=

Return on Total Assets Ratio

$31,022

/

$252,050

=

12.30%

11.

Return on Common Stockholders’ Equity

Net Income – Preferred Dividend

/

Average Common Stockholders’ Equity

=

Return on Common Stockholders’ Equity

$31,022 - $0

/

$143,289

=

21.64%

Average Stockholders’ equity =( Stockholders’ equity as on 31/12/16 + Stockholders’ equity as on 3/12/2017) / 2 = $(127,778 + 158,800)/2 = $143,289