Selected year-end financial statements of Cabot Corporation follow. (All sales w
ID: 2499844 • Letter: S
Question
Selected year-end financial statements of Cabot Corporation follow. (All sales were on credit; selected balance sheet amounts at December 31, 2012, were inventory, $48,900; total assets, $189,400; common stock, $90,000; and retained earnings, $22,748.)
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.(Use 365 days a year. Do not round intermediate calculations.)
Selected year-end financial statements of Cabot Corporation follow. (All sales were on credit; selected balance sheet amounts at December 31, 2012, were inventory, $48,900; total assets, $189,400; common stock, $90,000; and retained earnings, $22,748.)
Explanation / Answer
1. Current Ratio
= Current Assets/Current Liabilities
= (Cash + Short Term Investments + Accounts receivable + Notes receivable + Merchandise Inventory + Prepaid Expenses) / (Accounts Payable + Accrued Wages Payable + Income Tax Payable)
= 86,900 / 24,000
= 3.62
2. Acid Test Ratio
= Quick Assets / Current Liabilities
Quick Assets = Current Assets excluding Prepaid Expenses and Inventory
= 52,100 / 24,000
= 2.1708
3. Days' Sales Uncollected (Not sure about this one but worked out as per the source)
= 365 / Receivables Turnover
where Receivables Turnover = Net Credit Sales / Average Net Receivables
hence Receivables Turnover = 448,600 / 29,200 = 15.363
= 365 / 15.363
= 23.758 days
or 24 days
4. Inventory Turnover Ratio
= Cost of Goods Sold / Average Inventory
where Average Inventory = (Opening Inventory + Closing Inventory) / 2
= (48,900 +32,150) / 2
= 40,525
= 297,250 / 40,525
= 7.335 times
5. Days' Sales in Inventory
= No. of days in a year / Inventory Turnover Ratio
= 365 / 7.335
= 49.76 days
or 50 days
6. Debt to Equity Ratio
= Total Debt (Long Term + Short Term) / Equity (Stock + Retained Earnings)
= Long Term Notes Payable / Common Stock + Retained Earnings
= 63,400 / (62,800 + 90,000)
= 63,400 / 152,800
= 0.41 times
7. Times Interest Earned
= Earnings before Interest and Taxes / Interest Charges
= (151,350 - 98,600) / 4,100
= 12.865 times
8. Profit Margin Ratio
A) Gross Profit Margin Ratio
= Gross Profit / Sales
= 151,350 / 448,600
= 0.337
B) Net Profit Margin Ratio
= Net Profit / Sales
= 29,052 / 448,600
= 0.0647
9. Total Asset Turnover
= Net Sales / Total Assets
= 448,600 / 240,200
= 1.8676 times
10. Return on Total Assets
= Net Profit after Taxes / Total Assets
= 29,052 / 240,200
= 0.1209
i.e 12.09%
11. Return on Common Shareholders equity
= Net Profit after interest, tax and preference dividend / Common Stock + Retained Earnings
= 29,052 / (90,000 + 62,800)
= 0.1901
i.e. 19.01%
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