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, $54,900; total assets, $169,400; common stock, $87,000; and retained earnings, $35,579.)

CABOT CORPORATION Income Statement For Year Ended December 31, 2017
Sales	$	450,600
Cost of goods sold		298,150
Gross profit		152,450
Operating expenses		98,700
Interest expense		4,900
Income before taxes		48,850
Income taxes		19,679
Net income	$	29,171

CABOT CORPORATION Balance Sheet December 31, 2017
Assets				Liabilities and Equity
Cash	$	8,000		Accounts payable	$	17,500
Short-term investments		9,200		Accrued wages payable		3,600
Accounts receivable, net		31,400		Income taxes payable		3,400
Notes receivable (trade)*		7,500
Merchandise inventory		32,150		Long-term note payable, secured by mortgage on plant assets		62,400
Prepaid expenses		3,100		Common stock		87,000
Plant assets, net		147,300		Retained earnings		64,750
Total assets	$	238,650		Total liabilities and equity	$	238,650

* 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 1.

Current Assets = Total Assets - Plant Assets, net
Current Assets = $238,650 - $147,300
Current Assets = $91,350

Current Liabilities = Accounts Payable + Accrued Wages Payable + Income Taxes Payable
Current Liabilities = $17,500 + $3,600 + $3,400
Current Liabilities = $24,500

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $91,350 / $24,500
Current Ratio = 3.7 to 1

Answer 2.

Quick Assets = Current Assets - Merchandise Inventory - Prepaid Expenses
Quick Assets = $91,350 - $32,150 - $3,100
Quick Assets = $56,100

Acid-test Ratio = Quick Assets / Current Liabilities
Acid-test Ratio = $56,100 / $24,500
Acid-test Ratio = 2.3 to 1

Answer 3.

Current Receivables = Accounts Receivable, net + Notes Receivable (trade)
Current Receivables = $31,400 + $7,500
Current Receivables = $38,900

Days’ Sales Uncollected = Current Receivables / Sales * 365
Days’ Sales Uncollected = $38,900 / $450,600 * 365
Days’ Sales Uncollected = 31.5 days

Answer 4.

Average Inventory = ($54,900 + $32,150) / 2
Average Inventory = $43,525

Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = $298,150 / $43,525
Inventory Turnover = 6.9 times

Answer 5.

Days’ Sales in Inventory = Merchandise Inventory / Cost of Goods Sold * 365
Days’ Sales in Inventory = $32,150 / $298,150 * 365
Days’ Sales in Inventory = 39.4 days