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, $52,900; total assets, $229,400; common stock, $90,000; and retained earnings, $50,725.)

CABOT CORPORATION Income Statement For Year Ended December 31, 2017
Sales	$	455,600
Cost of goods sold		298,550
Gross profit		157,050
Operating expenses		98,600
Interest expense		3,900
Income before taxes		54,550
Income taxes		21,975
Net income	$	32,575

CABOT CORPORATION Balance Sheet December 31, 2017
Assets				Liabilities and Equity
Cash	$	20,000		Accounts payable	$	15,500
Short-term investments		8,400		Accrued wages payable		3,600
Accounts receivable, net		31,400		Income taxes payable		4,300
Notes receivable (trade)*		3,000
Merchandise inventory		42,150		Long-term note payable, secured by mortgage on plant assets		62,400
Prepaid expenses		2,850		Common stock		90,000
Plant assets, net		151,300		Retained earnings		83,300
Total assets	$	259,100		Total liabilities and equity	$	259,100

* These are short-term notes receivable arising from customer (trade) sales.

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

Compute the debt-to-equity ratio.

	(6) Debt-to-Equity Ratio Choose Numerator: / Choose Denominator: = Debt-to-Equity Ratio / = Debt-to-equity ratio 2017: / = to 1

Compute the times interest earned.

	(7) Times Interest Earned Choose Numerator: / Choose Denominator: = Times Interest Earned + / = Times interest earned 2017: + / = times

Compute the profit margin ratio.

	(8) Profit Margin Ratio Choose Numerator: / Choose Denominator: = Profit margin ratio / = Profit margin ratio 2017: / = %

Compute the total asset turnover.

	(9) Total Asset Turnover Choose Numerator: / Choose Denominator: = Total Asset Turnover / = Total asset turnover 2017: / = times

Compute the return on total assets.

	(10) Return on Total Assets Choose Numerator: / Choose Denominator: = Return on Total Assets / = Return on total assets 2017: / = %

Compute the return on common stockholders' equity.

	(11) Return on Common Stockholders' Equity Choose Numerator: / Choose Denominator = Return On Common Stockholders' Equity - / = Return on common stockholders' equity 2017: - / = %

Answer 1

Answer 5.

Days’ Sales in Inventory = Merchandise Inventory / Cost of Goods Sold * 365
Days’ Sales in Inventory = $42,150 / $298,550 * 365
Days’ Sales in Inventory = 51.5 days

Answer 6.

Total Liabilities = Accounts Payable + Accrued Wages Payable + Income Taxes Payable + Long-term Notes Payable
Total Liabilities = $15,500 + $3,600 + $4,300 + $62,400
Total Liabilities = $85,800

Total Equity = Common Stock + Retained Earnings
Total Equity = $90,000 + $83,300
Total Equity = $173,300

Debt-to-Equity Ratio = Total Liabilities / Total Equity
Debt-to-Equity Ratio = $85,800 / $173,300
Debt-to-Equity Ratio = 0.50 to 1

Answer 7.

Times Interest Earned = (Income before tax + Interest Expense) / Interest Expense
Times Interest Earned = ($54,550 + $3,900) / $3,900
Times Interest Earned = 14.9 times

Answer 8.

Profit Margin Ratio = Net Income / Sales
Profit Margin Ratio = $32,575 / $455,600
Profit Margin Ratio = 7.2%

Answer 9.

Average Total Assets = ($229,400 + $259,100) / 2
Average Total Assets = $244,250

Total Assets Turnover = Sales / Average Total Assets
Total Assets Turnover = $455,600 / $244,250
Total Assets Turnover = 1.9 times

Answer 10.

Return on Total Assets = Net Income / Average Total Assets
Return on Total Assets = $32,575 / $244,250
Return on Total Assets = 13.3%

Answer 11.

Average Common Stockholders’ Equity = ($90,000 + $50,725 + $90,000 + $83,300) / 2
Average Common Stockholders’ Equity = $157,012.50

Return on Common Stockholders’ Equity = (Net Income - Preferred Dividends) / Average Common Stockholders’ Equity
Return on Common Stockholders’ Equity = $32,575 / $157,012.50
Return on Common Stockholders’ Equity = 20.7%