Problem 17-4A Calculation of financial statement ratios LO P3 Selected year-end
ID: 2520779 • Letter: P
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, $56,900; total assets, $249,400; common stock, $81,000; and retained earnings, $51,308.)
* 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.)
Compute the current ratio and acid-test ratio.
Compute the days' sales uncollected.
Compute the inventory turnover.
Compute the days' sales in inventory.
Compute the debt-to-equity ratio.
Compute the times interest earned.
Compute the profit margin ratio.
Compute the total asset turnover.
Compute the return on total assets.
Compute the return on common stockholders' equity.
CABOT CORPORATIONIncome Statement
For Year Ended December 31, 2017 Sales $ 453,600 Cost of goods sold 298,350 Gross profit 155,250 Operating expenses 99,000 Interest expense 4,100 Income before taxes 52,150 Income taxes 21,008 Net income $ 31,142
Explanation / Answer
1) Current Ratio for 2017 = Current Assets/Current Liabilities
Current Assets = Cash+Short Term Investments+Accounts Receivable+Notes Receivable+Inventory+Prepaid Expenses
Current Assets = $18,000+$8,000+$31,200+$5,000+$40,150+$2,500 = $104,850
Current Liabilities = Accounts payable+Accrued Wages payable+Income taxes payable
= $19,500+$4,200+$4,600 = $28,300
Current Liabilities = Current Assets/Current Liabilities
= $104,850/$28,300 = 3.70
2) Acid Test Ratio = Liquid Assets/Current Liabilities
Liquid Assets = Current Assets - Inventory - Prepaid Expenses
= $104,850 - $40,150 - $2,500 = $62,200
Acid Test Ratio = $62,200/$28,300 = 2.20
3) Days' Sales Uncollected = (Accounts Receivable/Sales)*365 days
= ($31,200/$453,600)*365 days = 25 days
4) Inventory Turnover = Cost of goods sold/Average Inventory
Average Inventory = ($56,900+$40,150)/2 = $48,525
Inventory Turnover = $298,350/$48,525 = 6.15 times
5) Days’ Sales in Inventory = (Average Inventory/Cost of goods sold)*365 days
= $48,525/$298,350)*365 days = 59 days
6) Debt to Equity Ratio = Total Liabilities/Total Equity
Total Liabilities = Current Liabilities+Long Term Note Payable
= $28,300+$65,400 = $93,700
Total Equity = Total Liabilities and Equity - Total Liabilities
= $257,150 - $93,700 = $163,450
Debt to Equity Ratio = $93,700/$163,450 = 0.57