Question

Problem 17-4A 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, $56,900; total assets, $249,400; common stock, $81,000; and retained earnings, $51,308.)

CABOT CORPORATION Income Statement For Year Ended December 31, 2017
Sales	$	453,600
Cost of goods sold		298,350
Gross profit		155,250
Operating expenses		99,000
Interest expense		4,100
Income before taxes		52,150
Income taxes		21,008
Net income	$	31,142

CABOT CORPORATION Balance Sheet December 31, 2017
Assets				Liabilities and Equity
Cash	$	18,000		Accounts payable	$	19,500
Short-term investments		8,000		Accrued wages payable		4,200
Accounts receivable, net		31,200		Income taxes payable		4,600
Notes receivable (trade)*		5,000
Merchandise inventory		40,150		Long-term note payable, secured by mortgage on plant assets		65,400
Prepaid expenses		2,500		Common stock		81,000
Plant assets, net		152,300		Retained earnings		82,450
Total assets	$	257,150		Total liabilities and equity	$	257,150

* 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: / = 0 to 1 (2) Acid-Test Ratio Choose Numerator: / Choose Denominator: = Acid-Test Ratio / = Acid-Test Ratio 2017: / = 0 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 = 0 days Compute the inventory turnover. (4) Inventory Turnover Choose Numerator: / Choose Denominator: = Inventory Turnover / = Inventory turnover 2017: / = 0 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 = 0 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: / = 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

1) Current Ratio for 2017 = Current Assets/Current Liabilities

Current Assets = Cash+Short Term Investments+Accounts Receivable+Notes Receivable+Inventory+Prepaid Expenses

Current Assets = $18,000+$8,000+$31,200+$5,000+$40,150+$2,500 = $104,850

Current Liabilities = Accounts payable+Accrued Wages payable+Income taxes payable

= $19,500+$4,200+$4,600 = $28,300

Current Liabilities = Current Assets/Current Liabilities

= $104,850/$28,300 = 3.70

2) Acid Test Ratio = Liquid Assets/Current Liabilities

Liquid Assets = Current Assets - Inventory - Prepaid Expenses

= $104,850 - $40,150 - $2,500 = $62,200

Acid Test Ratio = $62,200/$28,300 = 2.20

3) Days' Sales Uncollected = (Accounts Receivable/Sales)*365 days

= ($31,200/$453,600)*365 days = 25 days

4) Inventory Turnover = Cost of goods sold/Average Inventory

Average Inventory = ($56,900+$40,150)/2 = $48,525

Inventory Turnover = $298,350/$48,525 = 6.15 times

5) Days’ Sales in Inventory = (Average Inventory/Cost of goods sold)*365 days

= $48,525/$298,350)*365 days = 59 days  

6) Debt to Equity Ratio = Total Liabilities/Total Equity

Total Liabilities = Current Liabilities+Long Term Note Payable

= $28,300+$65,400 = $93,700

Total Equity = Total Liabilities and Equity - Total Liabilities

= $257,150 - $93,700 = $163,450

Debt to Equity Ratio = $93,700/$163,450 = 0.57