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, $219,400; common stock, $85,000; and retained earnings, $42,307.)

CABOT CORPORATION Income Statement For Year Ended December 31, 2017
Sales	$	455,600
Cost of goods sold		297,250
Gross profit		158,350
Operating expenses		99,100
Interest expense		4,000
Income before taxes		55,250
Income taxes		22,257
Net income	$	32,993

CABOT CORPORATION Balance Sheet December 31, 2017
Assets				Liabilities and Equity
Cash	$	18,000		Accounts payable	$	16,500
Short-term investments		9,400		Accrued wages payable		4,800
Accounts receivable, net		30,400		Income taxes payable		4,100
Notes receivable (trade)*		4,000
Merchandise inventory		36,150		Long-term note payable, secured by mortgage on plant assets		64,400
Prepaid expenses		2,850		Common stock		85,000
Plant assets, net		149,300		Retained earnings		75,300
Total assets	$	250,100		Total liabilities and equity	$	250,100

* 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.)

Compute the current ratio and acid-test ratio.

	(1) Current Ratio Choose Numerator: / Choose Denominator: = Current Ratio / = Current ratio 2017: / = to 1 (2) Acid-Test Ratio y Choose Numerator: / Choose Denominator: = Acid-Test Ratio / = Acid-Test Ratio 2017: / = to 1

Compute the days' sales uncollected.

	(3) Days' Sales Uncollected Choose Numerator: / Choose Denominator: x Days = Days Sales Uncollected / x = Days sales uncollected 2017: / x = days

Compute the inventory turnover.

	(4) Inventory Turnover Choose Numerator: / Choose Denominator: = Inventory Turnover / = Inventory turnover 2017: / = times

• Req 3

Compute the days' sales in inventory.

	(5) Days’ Sales in Inventory Choose Numerator: / Choose Denominator: x Days = Days’ Sales in Inventory / x = Days’ sales in inventory 2017: / x = days

Answer 1

Answer 1.

Current Assets = Total Assets - Plant Assets, net
Current Assets = $250,100 - $149,300
Current Assets = $100,800

Current Liabilities = Accounts Payable + Accrued Wages Payable + Income Taxes Payable
Current Liabilities = $16,500 + $4,800 + $4,100
Current Liabilities = $25,400

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $100,800 / $25,400
Current Ratio = 4.0 to 1

Answer 2.

Quick Assets = Current Assets - Merchandise Inventory - Prepaid Expenses
Quick Assets = $100,800 - $36,150 - $2,850
Quick Assets = $61,800

Acid-test Ratio = Quick Assets / Current Liabilities
Acid-test Ratio = $61,800 / $25,400
Acid-test Ratio = 2.4 to 1

Answer 3.

Current Receivables = Accounts Receivable, net + Notes Receivable (trade)
Current Receivables = $30,400 + $4,000
Current Receivables = $34,400

Days’ Sales Uncollected = Current Receivables / Sales * 365
Days’ Sales Uncollected = $34,400 / $455,600 * 365
Days’ Sales Uncollected = 27.6 days

Answer 4.

Average Inventory = ($36,150 + $55,900) / 2
Average Inventory = $46,025

Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = $297,250 / $46,025
Inventory Turnover = 6.5 times

Answer 5.

Days’ Sales in Inventory = Merchandise Inventory / Cost of Goods Sold * 365
Days’ Sales in Inventory = $36,150 / $297,250 * 365
Days’ Sales in Inventory = 44.4 days