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, $199,400; common stock, $89,000; and retained earnings, $45,471.)

CABOT CORPORATION
Income Statement
For Year Ended December 31, 2017

Sales	$454,600
Cost of goods sold	297,550
Gross profit	157,050
Operating expenses	99,500
Interest expense	4,500
Income before taxes	53,050
Income taxes	21,371
Net income	$31,679

CABOT CORPORATION
Balance Sheet
December 31, 2017

Assets		Liabilities and Equity
Cash	$20,000	Accounts payable	$17,500
Short-term investments	9,000	Accrued wages payable	4,800
Accounts receivable, net	31,800	Income taxes payable	4,000
Notes receivable (trade)*	6,000
Merchandise inventory	32,150	Long-term note payable, secured by mortgage on plant assets	63,400
Prepaid expenses	2,600	Common stock	89,000
Plant assets, net	154,300	Retained earnings	77,150
Total assets	$255,850	Total liabilities and equity	$255,850

* 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

Type of Ratio	Formula	Workings	Ratio
Current Ratio	Current Assets/ Current Liabilities	101,550/26,300	3.86 : 1
Acid test ratio	Liquid assets/ Current Liabilities	66,800/26,300	2.54 : 1
Days sales uncollected	Accounts receivable/ Net sales*365	37,800/454,600*365	30.35days
Inventory turnover	Cost of goods sold/ Average inventory	297,550/ {(52,900+32,150)/2} =297,550/42,525	7 times
Days sales in inventory	365/ Inventory turnover ratio	365/ 7	52.14days
Debt to equity ratio	Debt/ Shareholder’s equity	63,400/ 166,150	38.16%
Times Interest earned ratio	EBIT/ Interest expenses	57,550/4,500	12.79 times
Profit margin ratio	Net income/ Net Sales	31,679/454,600	6.97%
Asset turnover	Net sales/ Average total assets	454,600/{(199400+255850)/2} = 454,600/227625	1.997 times
Return on assets	Net Income/ Average Total Assets	31,679/ 227,625	13.92%
Return on common stockholder’s equity	Net income/ Average common stock holder’s equity	31,679/{(89000+45471+89000+77150)/2} =14900/150,311	9.91%