Question

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, $48,900; total assets, $189,400; common stock, $85,000; and retained earnings, $35,703.) CABOT CORPORATION Income Statement For Current Year Ended December 31 $ 454,600 297,650 Sales Cost of goods sold Gross profit Operating expenses 156,950 99,400 3,800 Interest expense Income before taxes 53,750 21,653 Income tax expense $ 32,097 Net income CABOT CORPORATION Balance Sheet December 31 Liabilities and Equity Accounts payable Accrued wages payable Income taxes payable Long-term note payable, secured by mortgage on plant assets Assets $ 10,000 $ 15,500 Cash Short-term investments 9,400 30,400 38,150 3,800 3,200 67,400 Accounts receivable, net Merchandise inventory Prepaid expenses 2,450 152,300 Retained earnings Common stock 85,000 67,800 Plant assets, net $ 242,700 $ 242,700 Total liabilities and equity Total assets 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

First 5 parts are being answered here.

1. Current ratio = Current assets / Current liabilities

Current assets = Cash + short term investments + accounts receivable + merchandise inventory + Prepaid expenses

Current assets = $10000 + $9400 + $30400 + $38150 + $2450 = $90400

Current liabilities = Accounts payable + Accrued wages payable + Income taxes payable

Current liabilities = $15500 + $3800 + $3200 = $22500

Now, putting these values in the current ratio formula, we get,

Current ratio = $90400 / $22500 = 4.02

2. Acid test ratio = Current assets – Merchandise inventory – Prepaid expenses / Current liabilities

Current assets = $90400, Current liabilities = $22500, Inventories = $38150, Prepaid expenses = $2450

Acid test ratio = ($90400 - $38150 - $2450) / $22500

Acid test ratio = $49800 / $22500 = 2.21

3. For day's sales uncollected, we need to calculate accounts receivable turnover ratio first.

Accounts receivable turnover ratio = Credit sales / Accounts receivables

Credit sales = $454600, Accounts receivable = $30400

Putting these values in the accounts receivable turnover ratio formula, we get,

Accounts receivables turnover ratio = $454600 / $30400 = 14.9539473684 times

Now, we will calculate days's sales uncollected by the following formula,

Days' sales uncollected = 365 / Accounts receivable turnover ratio

Accounts receivable turnover ratio = 14.9539473684 times ( as computed above)

Putting these values in the Days' sales in inventory ratio formula, we get,

Days' sales uncollected  = 365 / 14.9539473684 = 24.41 days

4. Inventory turnover ratio = Cost of the goods sold / Average inventory

where, Average inventory = Beginning inventory + Ending inventory / 2

For current year:

Ending inventory = $38150, Beginning inventory = Ending inventory of prior year = $48900

Average inventory = ($38150 + $48900) / 2 = $87050 / 2 = $43525

Cost of the goods sold = $297650

Putting these values in the inventory turnover ratio formula, we get,

Inventory turnover ratio = $297650 / $43525 = 6.84 times

(5) Days' sales in inventory = 365 / Inventory turnover ratio

Inventory turnover ratio = 6.84 times ( as computed above)

Putting these values in the Days' sales in inventory ratio formula, we get,

Days' sales in inventory ratio = 365 / 6.84 = 53.36 days