Question

Problem 13-4A Calculating financial statement ratios LO P3

Selected current year-end financial statements of Cabot Corporation follow. (All sales were on credit; selected balance sheet amounts at December 31 of the prior year were inventory, $50,900; total assets, $169,400; common stock, $84,000; and retained earnings, $31,305.)

CABOT CORPORATION

Income Statement

For Current Year Ended December 31

Sales

$

455,600

Cost of goods sold

297,350

Gross profit

158,250

Operating expenses

98,800

Interest expense

4,700

Income before taxes

54,750

Income tax expense

22,055

Net income

$

32,695

CABOT CORPORATION

Balance Sheet

December 31

Assets

Liabilities and Equity

Cash

$

18,000

Accounts payable

$

16,500

Short-term investments

8,800

Accrued wages payable

4,400

Accounts receivable, net

32,000

Income taxes payable

4,800

Merchandise inventory

30,150

Long-term note payable, secured by mortgage on plant assets

72,400

Prepaid expenses

2,850

Common stock

84,000

Plant assets, net

154,300

Retained earnings

64,000

Total assets

$

246,100

Total liabilities and equity

$

246,100

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.)

Problem 13-4A Calculating financial statement ratios LO P3 Selected current year-end financial statements of Cabot Corporation follow. (All sales were on credit: selected balance sheet amounts at December 31 of the prior year were inventory. $50,900, total assets, $169,400, common stock, $84,000, and retained earnings, $31,305.) CABOT CORPORATION Income Statement For Current Year Ended December 31 Sales $ 455,600 Cost of goods sold 297, 350 Gross profit 158,250 Operating expenses 98.800 Interest expense 4,700 Income before taxes 54,750 Income tax expense 22,055 Net income $ 32,695 $ Assets Cash Short-term investments Accounts receivable, net Merchandise inventory CABOT CORPORATION Balance Sheet December 31 Liabilities and Equity $ 18,000 hecounts payable * 8.800 Accrued wages payable 32,000 Income taxes payable 30,150 Long-term note payable, secured by mortgage on plant assets 2.850 Common stock 154,300 Retained earnings $ 246,100 Total liabilities and equity 16,500 4,400 4,800 72,400 Prepaid expenses Plant assets, net Total assets 84,000 64,000 $ 246,100 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.) Complete this question by entering your answers in the tabs below.

Answer 1

Ratios calculated and explained:

Ratio type	Formula	Answer	Explanation
Current Ratio	Current Assets / Current liabilities	3.57	For current case, Current assets comprises of all the assets except Plant Assets from the current balance sheet. Current liabilities comprises of Accounts Payable, Accrued wages and income tax payable.
Acid test Ratio	(Cash+Cash Equivalents+Short term investments+Current Accounts Receivables)/ Current Liabilities	2.29	Cash, Short term investment and accounts receivables are divided by current liabilities (Accounts Payable, Accrued wages and income tax payable)
Days' sales uncollected	(Accounts Receivables / Net Sales)* 365	25.64	Accounts Receivables and Sales figures are used
Inventory turnover	Cost of goods sold / Average inventory	7.34	Cost of goods sold and Average inventory figures are used. Average inventory = (Opening inventory + Closing Inventory)/2
Days' sales in inventory	365/ Inventory turnover ratio	49.74	Inventory turnover ratio calculated above is used
Debt to equity ratio	Total liabilities / Total Equity	1.17	Debt to equity generally measures ratio of all liabilities to equity. At the discretion of users debt to equity is also used to measure debt (only borrowings and fixed payments) to equity. In later case debt will comprise of long term note payable only, for the current case
Times interest earned	Earning before Interest & Taxes/Interest expense	12.65	Earning before Interest & Taxes= Net Income + Interest Expense + Income tax expense
Profit Margin Ratio	(Net Income / Net Sales) * 100	7.18	Net Income and sales figures are used
Total asset turnover	Net Sales / Average Total Assets	2.19	Average Total Assets = (Opening Total Asset + Closing Total Asset)/2
Return on total assets	(Net Income / Average Total Assets) * 100	15.74	Average Total Assets = (Opening Total Asset + Closing Total Asset)/2
Return on common stock holder's equity	(Net Income / Average Common stock holders's equity) * 100	38.92	Average Common stock holders's equity= (Opening Common stock holders's equity + Closing Common stock holders's equity)/2

Formula with figures

1 Ratio type 2 Current Ratio Answer = (18000+8800+32000+30150+2850)/(16500+4400+4800) 3 Acid test Ratio 4 Days' sales uncollected 5 Inventory turnover 6 Days' sales in inventory 7 Debt to equity ratio 8 Times interest earned 9 Profit Margin Ratio 10 Total asset turnover 11 Return on total assets Return on common stock 12 holder's equity 12 B Formula Current Assets / Current liabilities (Cash+Cash Equivalents+Short term investments+Current Accounts Receivables)/ Current Liabilities (Accounts Receivables / Net Sales)* 365 Cost of goods sold / Average inventory 365/ Inventory turnover ratio Total liabilities/Total Equity Earning before Interest & Taxes/Interest expense (Net Income / Net Sales) * 100 Net Sales / Average Total Assets (Net Income / Average Total Assets) * 100 I=(18000+8800+32000)/(16500+4400+4800) =(32000/455600)*365 =297350/((50900+30150)/2) =365/5 =(16500+4400+4800+72400)/84000 =(32695+4700+22055)/4700 =(32695/455600)*100 -455600/((169400+246100)/2) =( 32695/((169400+246100)/2))*100 (Net Income / Average Common stock holders's equity) * 10 =(32695/((84000+84000)/2))*100