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, $52,900; total assets, $249,400; common stock, $90,000; and retained earnings, $41,047.) CABOT CORPORATION Balance Sheet December 31 of current year Liabilities and Equity Accounts payable 9,000 Accrued wages payable 29,800 Income taxes payable 40,150 Long-term note payable, secured by mortgage on plant assets 2,550 151,300 Common stock Retained earnings $ 252,800 Total liabilities and equity Assets Cash Short-term investments Accounts receivable, net Merchandise inventory Prepaid expenses Plant assets, net Total assets CABOT CORPORATION Income Statement $ 20,000 For Current Year Ended December 31 Sales Cost of goods sold Gross profit Operating expenses Interest expense Income before taxes Income tax expense Net income $ 449,600 297,650 151,950 98,900 4,900 48,150 19,397 $ 28,753 $ 18,500 3,400 4,700 66,400 90,000 69,800 $ 252,800 Req 1 and 2 Req 3 Req 4 Req 5 Req 6 Req 7 Req 8 Req 9 Req 10 Req 11 Compute the inventory turnover. (4) Numerator: Cost of goods sold $ Inventory Turnover Denominator: Average inventory 297,650 $ 40,150 Reg 3 Reg 5 Inventory Turnover Inventory turnover 7.4 times Compute the debt-to-equity ratio. (6) Debt-to-Equity Ratio Denominator: $ Numerator: Total liabilities Total equity 26,600 $ Debt-to-Equity Ratio = Debt-to-equity ratio 226,200 = 0.12 to 1 Compute the times interest earned. (7) Income before tax $ Times Interest Earned Numerator: Denominator: + Net sales Interest expense 48,150 + $ 449,600 $ 4,900 = Times Interest Earned Times interest earned 101.6 times Compute the total asset turnover. (9) Total Asset Turnover Numerator: Net sales $ Denominator: Average total assets 449,600 $ Rog 8 101,500 = Total Asset Turnover Total asset turnover Reg 10 4.4 times Compute the return on total assets. (10) Return on Total Assets Numerator: Net income $ 28,753 1 Denominator: Average total assets $ < Reg 9 Return on Total Assets Return on total assets 101,500 = 28.3 % Reg 11 > Compute the return on equity. (11) Numerator: Net income $ Return on Equity. Denominator Average total equity 28,753 $ 226,200 = Return On Equity Return on equity 12.7 %