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.)

CABOT CORPORATION Income 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

CABOT CORPORATION Balance Sheet December 31, 2017
Assets				Liabilities and Equity
Cash	$	18,000		Accounts payable	$	19,500
Short-term investments		8,000		Accrued wages payable		4,200
Accounts receivable, net		31,200		Income taxes payable		4,600
Notes receivable (trade)*		5,000
Merchandise inventory		40,150		Long-term note payable, secured by mortgage on plant assets		65,400
Prepaid expenses		2,500		Common stock		81,000
Plant assets, net		152,300		Retained earnings		82,450
Total assets	$	257,150		Total liabilities and equity	$	257,150

* These are short-term notes receivable arising from customer (trade) sales.

Compute the times interest earned.

(7)	Times Interest Earned
	Choose Numerator:			/	Choose Denominator:	=	Times Interest Earned
		+		/		=	Times interest earned
2017:		+		/		=	0	times

Identify the company you consider to be the better short-term credit risk.

Compute the profit margin ratio.

(8)	Profit Margin Ratio
	Choose Numerator:	/	Choose Denominator:	=	Profit margin ratio
		/		=	Profit margin ratio
2017:		/		=	0	%

Compute the total asset turnover.

(9)	Total Asset Turnover
	Choose Numerator:	/	Choose Denominator:	=	Total Asset Turnover
		/		=	Total asset turnover
2017:		/		=	0	times

Compute the return on total assets.

(10)	Return on Total Assets
	Choose Numerator:	/	Choose Denominator:	=	Return on Total Assets
		/		=	Return on total assets
2017:		/		=	0	%

Compute the return on common stockholders' equity.

(11)	Return on Common Stockholders' Equity
	Choose Numerator:			/	Choose Denominator	=	Return On Common Stockholders' Equity
		-		/		=	Return on common stockholders' equity
2017:		-		/		=	0	%

Answer 1

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%