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, $54,900; total assets, $249,400; common stock, $83,000; and retained earnings, $37,776.)

CABOT CORPORATION Income Statement For Year Ended December 31, 2017
Sales	$	455,600
Cost of goods sold		297,350
Gross profit		158,250
Operating expenses		99,100
Interest expense		4,100
Income before taxes		55,050
Income taxes		22,176
Net income	$	32,874

CABOT CORPORATION Balance Sheet December 31, 2017
Assets				Liabilities and Equity
Cash	$	20,000		Accounts payable	$	17,500
Short-term investments		9,400		Accrued wages payable		4,800
Accounts receivable, net		32,000		Income taxes payable		4,700
Notes receivable (trade)*		4,500
Merchandise inventory		32,150		Long-term note payable, secured by mortgage on plant assets		71,400
Prepaid expenses		2,700		Common stock		83,000
Plant assets, net		151,300		Retained earnings		70,650
Total assets	$	252,050		Total liabilities and equity	$	252,050

* 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

Answer 1.

Current Assets = Total Assets - Plant Assets, net
Current Assets = $252,050 - $151,300
Current Assets = $100,750

Current Liabilities = Accounts Payable + Accrued Wages Payable + Income Taxes Payable
Current Liabilities = $17,500 + $4,800 + $4,700
Current Liabilities = $27,000

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $100,750 / $27,000
Current Ratio = 3.7 to 1

Answer 2.

Quick Assets = Current Assets - Merchandise Inventory - Prepaid Expenses
Quick Assets = $100,750 - $32,150 - $2,700
Quick Assets = $65,900

Acid-test Ratio = Quick Assets / Current Liabilities
Acid-test Ratio = $65,900 / $27,000
Acid-test Ratio = 2.4 to 1

Answer 3.

Current Receivables = Accounts Receivable, net + Notes Receivable (trade)
Current Receivables = $32,000 + $4,500
Current Receivables = $36,500

Days’ Sales Uncollected = Current Receivables / Sales * 365
Days’ Sales Uncollected = $36,500 / $455,600 * 365
Days’ Sales Uncollected = 29.2 days

Answer 4.

Average Inventory = ($54,900 + $32,150) / 2
Average Inventory = $43,525

Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = $297,350 / $43,525
Inventory Turnover = 6.8 times

Answer 5.

Days’ Sales in Inventory = Merchandise Inventory / Cost of Goods Sold * 365
Days’ Sales in Inventory = $32,150 / $297,350 * 365
Days’ Sales in Inventory = 39.5 days