Problem 17-4A Calculation of financial statement ratios LO P3 Selected year-end
ID: 2520887 • 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.
Compute the times interest earned.
Identify the company you consider to be the better short-term credit risk.
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
Answer 7.
Times Interest Earned = (Income before tax + Interest expense) / Interest expense
Times Interest Earned = ($52,150 + $4,100) / $4,100
Times Interest Earned = 13.7 times
Answer 8.
Profit Margin Ratio = Net Income / Net Sales
Profit Margin Ratio = $31,142 / $453,600
Profit Margin Ratio = 6.9%
Answer 9.
Average Total Assets = ($257,150 + $249,400) / 2
Average Total Assets = $253,275
Total Asset Turnover = Net Sales / Average Total Assets
Total Asset Turnover = $453,600 / $253,275
Total Asset Turnover = 1.8 times
Answer 10.
Return on Total Assets = Net Income / Average Total Assets
Return on Total Assets = $31,142 / $253,275
Return on Total Assets = 12.3%
Answer 11.
Average Common Stockholders’ Equity = ($81,000 + $51,308 + $81,000 + $82,450) / 2
Average Common Stockholders’ Equity = $147,879
Return on Common Stockholders’ Equity = (Net Income - Preferred Dividends) / Average Common Stockholders’ Equity
Return on Common Stockholders’ Equity = ($31,142 - $0) / $147,879
Return on Common Stockholders’ Equity = 21.1%