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.

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 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

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 to Part 1.

Current Ratio = Current Assets / Current Liabilities
Current Assets = Cash + Short Term Investments + Accounts Receivable, Net + Notes Receivable, Trade + Merchandise Inventory + Prepaid Expenses
Current Assets = $20,000 + $8,400 + $31,400 + $3,000 + $42,150 + $2,850
Current Assets = $107,800

Current Liabilities = Accounts Payable + Accrued Wages Payable + Income Taxes Payable
Current Liabilities = $15,500 + $3,600 + $4,300
Current Liabilities = $23,400

Current Ratio = 107,800 / 23,400
Current Ratio = 4.61: 1

Answer to Part 2.

Acid-Test Ratio = (Current Assets – Merchandise Inventory – Prepaid Expenses) / Current Liabilities
Acid-Test Ratio = (107,800 – 42,150 – 2,850) / 23,400
Acid-Test Ratio = 62,800 / 23,400
Acid-Test Ratio = 2.68: 1

Answer to Part 3.

Days’ Sales Collected = 365 * Current Receivable / Net Sales
Current Receivable = $31,400 + $3,000 = $34,400

Days’ Sales Collected = 365 * 34,400 / 455,600
Days’ Sales Collected = 27.56 or 28 days

Answer to Part 4.

Inventory Turnover = Cost of Goods Sold / Average Inventory
Average Inventory = (42,150 + 52,900) / 2
Average Inventory = $47,525

Inventory Turnover = 298,550 / 47,525
Inventory Turnover = 6.28 times