Question

Problem 13-4A Calculating financial statement ratios LO P3 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, $48,900; total assets, $189,400; common stock, $90,000; and retained earnings, $33,748.) CABOT CORPORATION Income Statement For Current Year Ended December 31 Sales $ 448,600 Cost of goods sold 297,250 Gross profit 151,350 Operating expenses 98,600 Interest expense 4,100 Income before taxes 48,650 Income tax expense 19,598 Net income $ 29,052 CABOT CORPORATION Balance Sheet December 31 Assets Liabilities and Equity Cash $ 10,000 Accounts payable $ 17,500 Short-term investments 8,400 Accrued wages payable 3,200 Accounts receivable, net 33,700 Income taxes payable 3,300 Merchandise inventory 32,150 Long-term note payable, secured by mortgage on plant assets 63,400 Prepaid expenses 2,650 Common stock 90,000 Plant assets, net 153,300 Retained earnings 62,800 Total assets $ 240,200 Total liabilities and equity $ 240,200 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

Answer :-

1. Current Ratio = Current Assets/ Current Liabilities

Current Ratio = $86,900 / $24,000 = 3.62

2. Acid test Ratio = Quick assets/ Current Liabilities

Acid test Ratio = $52,100 / $24,000 = 2.17

3. Days' sales uncollected = Current Receivable/ Net sales *365

Days' sales uncollected = $33,700 / $448,600*365 = 27.4 days

4. Inventory Turnover = Cost of goods sold / Average Inventory

Inventory Turnover = $297,250/$40,525 = 7.3

5. Days' sales in inventory = Merchandise inventory/ Cost of goods sold *365

Days' sales in inventory = $32,150 / $297,250*365 = 39.5 days

6. Debt to equity = Total Liabilities/ Total equity

Debt to equity = $87,400 / $152,800 = 0.57

7. Times Interest earned = EBIT / Interest expense

Times Interest earned = $52,750 / $4,100 = 12.9

8. Profit Margin Ratio = Net Income / Net sales

Profit Margin Ratio = $29,052 / $448,600 = 6.5%

9. Total assets turnover = Net sales / Average total assets

Total assets turnover = $448,600 / $214,800 = 2.1

10. Return on total assets = Net Income / Average total assets

Return on total assets = $29,052 / $214,800 = 13.5%

11. Return on common stockholders' equity = Net Income - Preferred dividends/ Average common stockholders equity

Return on common stockholders' equity = $29,052 / $138,274 =21.01%

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