Question

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.

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.)

	(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

	(3) Days' Sales Uncollected Choose Numerator: / Choose Denominator: x Days = Days Sales Uncollected / x = Days sales uncollected 2017: / x = 0 days

4) Inventory Turnover Choose Numerator: / Choose Denominator: = Inventory Turnover / = Inventory turnover 2017: / = 0 times

	(5) Days’ Sales in Inventory Choose Numerator: / Choose Denominator: x Days = Days’ Sales in Inventory / x = Days’ sales in inventory 2017: / x = 0 days

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

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

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

Answer 1

Answer 1.

Current Assets = Total Assets - Plant Assets, net
Current Assets = $242,400 - $149,300
Current Assets = $93,100

Current Liabilities = Accounts Payable + Accrued Wages Payable + Income Taxes Payable
Current Liabilities = $15,500 + $3,400 + $3,500
Current Liabilities = $22,400

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $93,100 / $22,400
Current Ratio = 4.2 to 1

Answer 2.

Quick Assets = Current Assets - Merchandise Inventory - Prepaid Expenses
Quick Assets = $93,100 - $34,150 - $2,650
Quick Assets = $56,300

Acid-test Ratio = Quick Assets / Current Liabilities
Acid-test Ratio = $56,300 / $22,400
Acid-test Ratio = 2.5 to 1

Answer 3.

Current Receivables = Accounts Receivable, net + Notes Receivable (trade)
Current Receivables = $31,000 + $4,500
Current Receivables = $35,500

Days’ Sales Uncollected = Current Receivables / Sales * 365
Days’ Sales Uncollected = $35,500 / $450,600 * 365
Days’ Sales Uncollected = 28.8 days

Answer 4.

Average Inventory = ($50,900 + $34,150) / 2
Average Inventory = $42,525

Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = $298,050 / $42,525
Inventory Turnover = 7.0 times

Answer 5.

Days’ Sales in Inventory = Merchandise Inventory / Cost of Goods Sold * 365
Days’ Sales in Inventory = $34,150 / $298,050 * 365
Days’ Sales in Inventory = 41.8 days