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, $49,900; total assets, $189,400; common stock, $84,000; and retained earnings, $44,119.)

CABOT CORPORATION
Income Statement
For Year Ended December 31, 2017

Sales	$449,600
Cost of goods sold	297,550
Gross profit	152,050
Operating expenses	98,800
Interest expense	4,300
Income before taxes	48,950
Income taxes	19,719
Net income	$29,231

CABOT CORPORATION
Balance Sheet
December 31, 2017

Assets		Liabilities and Equity
Cash	$16,000	Accounts payable	$17,500
Short-term investments	9,200	Accrued wages payable	3,400
Accounts receivable, net	30,400	Income taxes payable	3,100
Notes receivable (trade)*	7,000
Merchandise inventory	36,150	Long-term note payable, secured by mortgage on plant assets	71,400
Prepaid expenses	2,700	Common stock	84,000
Plant assets, net	151,300	Retained earnings	73,350
Total assets	$252,750	Total liabilities and equity	$252,750

* 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 Choose Numerator: / Choose Denominator: = Current Ratio Current assets / Current liabilities = Current Ratio 2017: $101450 / $24000 = 4.2 to 1

Current Assets = Cash + Short Term Investment + Account Receivable + Notes Receivable + Merchandise Inventory + Prepaid Exp

= $16000 + $9200 + $30400 + $7000 + $36150 + $2700 = $101450

Current Liabilities = Accounts Payable + Accrued Wages Payable + Income Tax Payable

               = $17500 + $3400 + $3100 = $24000

	(2) Acid-Test Ratio Choose Numerator: / Choose Denominator: = Acid-Test Ratio Quick assets / Current liabilities = Acid-Test Ratio 2017: $62600 / $24000 = 2.6 to 1

Quick Asset = Current Assets – Merchandise Inventory – Prepaid Exp

    = $101450 - $36150 - $2700 = $62600

	(3) Days Sales Uncollected Choose Numerator: / Choose Denominator: x Days = Days Sales Uncollected Current receivables / Net sales x 365 = Days Sales Uncollected 2017: $37400 / $449600 x 365 = 30.4 days

Current Receivable = Account Receivable + Notes Receivable

      = $30400 + $7000 = $37400

	(4) Inventory Turnover Choose Numerator: / Choose Denominator: = Inventory Turnover Cost of goods sold / Average inventory = Inventory Turnover 2017: $297550 / $43025 = 6.9 times

Average Inventory = (Beginning Inventory + Ending Inventory)/2

    = ($49900 + $36150)/2 =

	(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 2017: $36150 / $297550 x 365 = 44.3 days

	(6) Debt-to-Equity Ratio Choose Numerator: / Choose Denominator: = Debt-to-Equity Ratio Total liabilities / Total equity = Debt-to-Equity Ratio 2017: $95400 / $157350 = 0.60 to 1

Total Liabilities = Accounts Payable + Accrued Wages Payable + Income Tax Payable + Long-term note payable

               = $17500 + $3400 + $3100 + $71400 = $95400

Total Equity = Common Stock + Retained Earnings

= $84000 + $73350 = $157350

	(7) Times Interest Earned Choose Numerator: / Choose Denominator: = Times Interest Earned Income before tax + Interest expense / Interest expense = Times Interest Earned 2017: $48950 + $4300 / $4300 = 12.4 times

	(8) Profit Margin Ratio Choose Numerator: / Choose Denominator: = Profit margin ratio Net income / Net sales = Profit margin ratio 2017: $29231 / $449600 = 6.5 %

	(9) Total Asset Turnover Choose Numerator: / Choose Denominator: = Total Asset Turnover Net sales / Average total assets = Total Asset Turnover 2017: $449600 / $221075 = 2.0 times

Average Total Assets = (Beginning Total Assets + Ending Total Assets)/2

    = ($189400 + $252750)/2 = $221075

	(10) Return on Total Assets Choose Numerator: / Choose Denominator: = Return on Total Assets Net income / Average total assets = Return on Total Assets 2017: $29231 / $221075 = 13.2 %

	(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 2017: $29231 - / $142734.5 = 20.5 %

Average common stockholders' equity = (Beginning Common Stock + Beginning Retained Earning + Ending Common Stock + Ending Retained Earning)

    = ($84000 + $44119 + $84000 + $73350)/2 = $142734.5