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, $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

1	Current ratio
	Current assets
	Cash	20000
	Short term investment	9000
	Account receivable	31800
	Note receivable	6000
	Inventory	32150
	Total current assets	98950
	Current liabilities
	Account payable	17500
	Accrued wages payable	4800
	Income tax payable	4000
	Total current liabilities	26300
	Current ratio=(current assets/current liabilities)	98950/26300	3.76
2	Acid test ratio
	Total current assets	$                            98,950.00
	Inventory	$                            32,150.00
	Prepaid expenses	$                              2,600.00
	Current liabilities	$                            26,300.00
	Acid test ratio=((current assets-inventory-prepaid expenses)/current liabilities)	((98950-32150-2600)/26300)	2.44
3	Days' sales uncollected
	Notes receivable	$                              6,000.00
	Account receivable	$                            31,800.00
	Net credit sale	$                         454,600.00
	Days' sales uncollected=((accounts receivable +notes receivable)/net credit sale)*365	((6000+31800)/454600)*365	30.35
4	Inventory turn over
	Cost of goods sold	$                         297,550.00
	Average inventory=(opening inventory +closing inventory)/2	$                            42,525.00 ((52900+32150)/2)
	Inventory turnover=cost of goods sold/ average inventory	297550/42525	7.00

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