Question

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, $54,900; total assets, $199,400; common stock, $86,000; and retained earnings, $30,301.)

CABOT CORPORATION Income Statement For Current Year Ended December 31
Sales	$	455,600
Cost of goods sold		298,150
Gross profit		157,450
Operating expenses		99,200
Interest expense		5,000
Income before taxes		53,250
Income tax expense		21,451
Net income	$	31,799

CABOT CORPORATION Balance Sheet December 31
Assets				Liabilities and Equity
Cash	$	8,000		Accounts payable	$	18,500
Short-term investments		8,800		Accrued wages payable		3,400
Accounts receivable, net		33,400		Income taxes payable		3,800
Merchandise inventory		36,150		Long-term note payable, secured by mortgage on plant assets		65,400
Prepaid expenses		2,550		Common stock		86,000
Plant assets, net		150,300		Retained earnings		62,100
Total assets	$	239,200		Total liabilities and equity	$	239,200

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

First 4 ratios are being calculated here:

1. Current ratio = Current assets / Current liabilities

Current assets = Cash + short term investments + accounts receivable + merchandise inventory + Prepaid expenses

Current assets = $8000 + $8800 + $33400 + $36150 + $2550 = $88900

Current liabilities = Accounts payable + Accrued wages payable + Income taxes payable

Current liabilities = $18500 + $3400 + $3800 = $25700

Now, putting these values in the current ratio formula, we get,

Current ratio = $88900 / $25700 = 3.46

2. Quick ratio = Current assets – Inventories – Prepaid expenses / Current liabilities

Current assets = $88900, Current liabilities = $25700, Inventories = $36150, Prepaid expenses = $2550

Quick ratio = ($88900 - $36150 - $2550) / $25700

Quick ratio = $50200 / $25700 = 1.95

3 Days' sales uncollected = 365 * Accounts receivable / Credit sales

Putting the values in the Days' sales uncollected ratio formula, we get,

Days' sales uncollected = 365 * $33400 / $455600 = 26.76 days

4. Inventory turnover ratio = Cost of the goods sold / Average inventory

where, Average inventory = Beginning inventory + Ending inventory / 2

Ending inventory = $36150, Beginning inventory = Ending inventory of previous year = $54900

Average inventory = ($54900 + $36150) / 2 = $91050 / 2 = $45525

Cost of the goods sold = $298150

Putting these values in the inventory turnover ratio formula, we get,

Inventory turnover ratio = $298150 / $45525 = 6.55

5 Days' sales in inventory = 365 / Inventory turnover ratio

Inventory turnover ratio = 6.55 times ( as computed in point (4) above)

Putting thes values in the Days' sales in inventory ratio formula, we get,

Days' sales in inventory ratio = 365 / 6.55 = 55.72 days