Question

Q:

Problem 13-4A Calculation of financial statement ratios LO P3

Selected year-end financial statements of Cabot Corporation follow. (All sales were on credit; selected balance sheet amounts at December 31, 2016, were inventory, $50,900; total assets, $219,400; common stock, $86,000; and retained earnings, $39,951.)

CABOT CORPORATION Income Statement For Year Ended December 31, 2017
Sales	$	450,600
Cost of goods sold		298,050
Gross profit		152,550
Operating expenses		98,900
Interest expense		4,000
Income before taxes		49,650
Income taxes		20,001
Net income	$	29,649

CABOT CORPORATION Balance Sheet December 31, 2017
Assets				Liabilities and Equity
Cash	$	12,000		Accounts payable	$	15,500
Short-term investments		8,800		Accrued wages payable		3,400
Accounts receivable, net		31,000		Income taxes payable		3,500
Notes receivable (trade)*		4,500
Merchandise inventory		34,150		Long-term note payable, secured by mortgage on plant assets		64,400
Prepaid expenses		2,650		Common stock		86,000
Plant assets, net		149,300		Retained earnings		69,600
Total assets	$	242,400		Total liabilities and equity	$	242,400

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

Compute the debt-to-equity ratio.

	(6) Debt-to-Equity Ratio Choose Numerator: / Choose Denominator: = Debt-to-Equity Ratio / = Debt-to-equity ratio 2017: / = 0 to 1

Compute the times interest earned.

	(7) Times Interest Earned Choose Numerator: / Choose Denominator: = Times Interest Earned + / = Times interest earned 2017: + / = 0 times

Compute the profit margin ratio.

	(8) Profit Margin Ratio Choose Numerator: / Choose Denominator: = Profit margin ratio / = Profit margin ratio 2017: / = 0 %

Compute the total asset turnover.

	(9) Total Asset Turnover Choose Numerator: / Choose Denominator: = Total Asset Turnover / = Total asset turnover 2017: / = 0 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: / = 0 %

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: - / = 0 %

Answer 1

Answer of Part 6:

Total Liabilities = Accounts Payable + Accrued wages payable + Income Taxes payable + Long term note payable
Total Liabilities = $15,500 + $3,400 + $3,500 + $64,400
Total Liabilities = $86,800

Total Equity = Common Stock + Retained Earnings
Total Equity = $86,000 + $69,600
Total Equity = $155,600

Debt-Equity ratio = Total Liabilities /Total Equity
Debt-Equity Ratio = $86,800 / $155,600
Debt-Equity Ratio = 0.56

Answer of Part 7:

EBIT = Gross Profit – Operating Expenses
EBIT = $152,550 - $98,900
EBIT = $53,650

Times Interest Earned = EBIT / Interest Expense
Times Interest Earned = $53,650 / $4,000
Times Interest Earned = 13.41

Answer of Part 8:

Profit Margin Ratio = Net Income / Net Sales
Profit Margin Ratio = $29,649 / $450,600
Profit Margin Ratio = 6.58%

Answer of Part 9:

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
Average Total Assets = ($219,400 + $242,400) /2
Average Total Assets = $230,900

Total Assets Turnover = Net Sales / Average Total Assets
Total Assets Turnover = $450,600 / $230,900
Total Assets Turnover = 1.95