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, $46,900; total assets, $229,400; common stock, $90,000; and retained earnings, $41,934.) CABOT CORPORATION Income Statement For Year Ended December 31, 2017 Sales $ 448,600 Cost of goods sold 298,450 Gross profit 150,150 Operating expenses 99,000 Interest expense 3,900 Income before taxes 47,250 Income taxes 19,034 Net income $ 28,216 CABOT CORPORATION Balance Sheet December 31, 2017 Assets Liabilities and Equity Cash $ 14,000 Accounts payable $ 16,500 Short-term investments 8,600 Accrued wages payable 4,400 Accounts receivable, net 32,000 Income taxes payable 3,200 Notes receivable (trade)* 5,500 Merchandise inventory 32,150 Long-term note payable, secured by mortgage on plant assets 64,400 Prepaid expenses 3,100 Common stock 90,000 Plant assets, net 153,300 Retained earnings 70,150 Total assets $ 248,650 Total liabilities and equity $ 248,650 * 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.)

Answer 1

Answer to Part 1.

Current Ratio = Current Assets / Current Liabilities
Current Assets = Cash + Short term Investments + Accounts Receivable + Notes Receivable (Trade) + Merchandise Inventory + Prepaid Expenses
Current Assets = $14,000 + $8,600 + $32,000 + $5,500 + $32,150 + $3,100
Current Assets = $95,350

Current Liabilities = Accounts Payable + Accrued Wages Payable + Income Taxes Payable
Current Liabilities = $16,500 + $4,400 + $3,200
Current Liabilities = $24,100

Current Ratio = 95,350 / 24,100
Current Ratio = 3.96 : 1

Answer to Part 2.

Acid Test Ratio = (Current Assets – Merchandise Inventory – Prepaid Expense) / Current Liabilities
Acid Test Ratio = (95,350 – 32,150 – 3,100) / 24,100
Acid Test Ratio = 60,100 / 24,100
Acid Test Ratio = 2.49 :1

Answer to Part 3.

Days’ Sales Collected = Current Receivables / Net Sales * 365
Days’ Sales Collected = 32,000 / 448,600 * 365
Days’ Sales Collected = 26.03 or 26 days

Answer to Part 4.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Average Inventory = (46,900 + 32,150) / 2
Average Inventory = $39,525

Inventory Turnover Ratio = 298,450 / 39,525
Inventory Turnover Ratio = 7.55 times

Answer to Part 5.

Days’ Sales in Inventory = Merchandise Inventory / Cost of Goods Sold * 365
Days’ Sales in Inventory = 32,150 / 298,450 * 365
Days’ Sales in Inventory = 39.31 or 39 days