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, $53,900; total assets, $259,400; common stock, $83,000; and retained earnings, $57,668.) CABOT CORPORATION Income Statement For Year Ended December 31, 2017 Sales Cost of goods sold Gross profit Operating expenses Interest expense Income before taxes Income taxes Net income $ 456,600 297,950 158,650 98,600 4,400 55,650 22,418 $ 33,232 CABOT CORPORATION Balance Sheet December 31, 2017 Liabilities and Equity Assets Cash Short-term investments Accounts receivable, net Notes receivable (trade) Merchandise inventory $ 22,000 Accounts payable $ 17,500 3,200 2,900 8,600 Accrued wages payable 29,000 Income taxes payable 7,000 40,150 Long-term note payable, secured by 63,400 mortgage on plant assets Prepaid expenses Plant assets, net Total assets 2,850 Common stock 151,300 Retained earnings 83,000 90,900 $ 260,900 $260,900 Total liabilities and equity * 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 / current liabilities

= 109600 / 23600

= 4.64

Note:- current assets = cash + short term investment + accounts receivable + notes receivable + merchandise inventory + perpaid expense

current liabilities = Accounts payable + accrued wage payable + income tax payable

2) current ratio = [current assets - merchandise inventory - perpaid expense ] / current liabilities

= 66600 / 23600

= 2.82

4) inventory turnover ratio = cost of goods sold / average inventory

= 297950 / [(53900 + 40150)/2]

= 297950 / 47025

= 6.34

5) days sales in inventory = number of days / inventory turnover ratio

= 365 / 6.34

= 57.57

6) debt to equity ratio = total liabilities / total equity

= 87000 / 173900

= 0.50

7) times interest earned = Earning before interest and tax / interest expense

=[income before tax + interest] / interest expense

= [55650 + 4400] / 4400

= 60050 / 4400

= 13.65

8) profit margin ratio = net income / sales

= 33232 / 456600

= 7.28%

9) total assets turnover = sales / average total assets

=456600 / [(259400 + 260900 )/2]

=456600 / 260150

= 1.76

10) return on total assets = net income / average total assets

= 33232 / [(259400 + 260900 )/2]

= 33232 / 260150

=12.77%

11) return on common stockholder's equity = net income / average common stockholder's equity

= 33232 / [({83000+57668}+{83000+90900})/2]

= 33232 / [(140668+173900)/2]

= 33232 / 157284

= 21.13%