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, $48,900; total assets, $189,400; common stock, $90,000; and retained earnings, $22,748.) CABOT CORPORATION Income Statement For Year Ended December 31, 2017 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 taxes 19,598 Net income $ 29,052 CABOT CORPORATION Balance Sheet December 31, 2017 Assets Liabilities and Equity Cash $ 10,000 Accounts payable $ 17,500 Short-term investments 8,400 Accrued wages payable 3,200 Accounts receivable, net 29,200 Income taxes payable 3,300 Notes receivable (trade)* 4,500 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 * 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 to Requirement 1.

Current Ratio = Current Assets / Current Liabilities

Current Assets = Cash + Short Term Investments + Accounts Receivable, net + Notes Receivable + Merchandise Inventory + Prepaid Expenses
Current Assets = $10,000 + $8,400 + $29,200 + $4,500 + $32,150 + $2,650
Current Assets = $86,900

Current Liabilities = Accounts Payable + Accrued Wages Payable + Income Taxes Payable
Current Liabilities = $17,500 + $3,200 + $3,300
Current Liabilities = $24,000

Current Ratio = 86,900 / 24,000
Current Ratio = 3.62: 1

Answer to Requirement 2.

Acid Test Ratio = (Current Assets – Merchandise Inventory – Prepaid Expenses) / Current Liabilities
Acid Test Ratio = (86,900 – 32,150 – 2,650) / 24,000
Acid Test Ratio = 52,100 / 24,000
Acid Test Ratio = 2.17: 1

Answer to Requirement 3.

Days’ Sales Uncollected = 365 * Accounts Receivable / Net Sales
Days’ Sales Uncollected = 365 * 29,200 / 448,600
Days’ Sales Uncollected = 23.75 or 24 days

Answer to Requirement 4.

Inventory Turnover = Cost of Goods Sold / Average Inventory
Average Inventory = (48,900 + 32,150) / 2
Average Inventory = $40,525

Inventory Turnover = 297,250 / 40,525
Inventory Turnover = 7.33 times

Answer to Requirement 5.

Days’ Sales In Inventory = 365 / Inventory Turnover
Days’ Sales In Inventory = 365 / 7.33
Days’ Sales In Inventory = 49.80 or 50 days