Answer:
NELSON COMPANY
A. Current Ratio = Current Assets/Current Liabilities
= $38,500/$13,000
= 2.96: 1
B. Acid-test Ratio = (Current Assets - Inventory)/Current Liabilities
=$24,600/$13,000
= 1.89: 1
C. Gross margin ratio = (Gross margin/Net Sales) × 100
=$70,750/$110,950 × 100
= 63.77%
Explanation:
a) Data and Calculations:
NELSON COMPANY
1. Unadjusted Trial Balance as of January 31, 2013
Debit Credit
Cash $ 24,600
Merchandise inventory 12,500
Store supplies 5,900
Prepaid insurance 2,300
Store equipment 42,900
Accumulated depreciation—
Store equipment $ 19,950
Accounts payable 13,000
J. Nelson, Capital 39,000
J. Nelson, Withdrawals 2,100
Sales 115,200
Sales discounts 2,000
Sales returns and allowances 2,250
Cost of goods sold 38,000
Depreciation expense—
Store equipment 0
Salaries expense 31,300
Insurance expense 0
Rent expense 14,000
Store supplies expense 0
Advertising expense 9,300
Totals $ 187,150 $ 187,150
2. Adjusted Trial Balance as of January 31, 2013
Debit Credit
Cash $ 24,600
Merchandise inventory 10,300
Store supplies 2,800
Prepaid insurance 800
Store equipment 42,900
Accumulated depreciation—
Store equipment $ 21,625
Accounts payable 13,000
J. Nelson, Capital 39,000
J. Nelson, Withdrawals (2,100
)
Sales 115,200
Sales discounts 2,000
Sales returns and allowances 2,250
Cost of goods sold 40,200
Depreciation expense—
Store equipment 1,675
Salaries expense 31,300
Insurance expense 1,500
Rent expense 14,000
Store supplies expense 3,100
Advertising expense 9,300
Totals $ 188,825 $ 188,825
3. NELSON COMPANY
Income Statement for the year ended January 31, 2013:
Sales Revenue $110,950
Cost of goods sold 40,200
Gross profit $70,750
Depreciation expense—
Store equipment 1,675
Salaries expense 31,300
Insurance expense 1,500
Rent expense 14,000
Store supplies expense 3,100
Advertising expense 9,300 60,875
Net Income $ 9,875
4. Sales Revenue $115,200
Sales discount & allowances (4,250)
Net Sales Revenue $110,950
5. NELSON COMPANY
Balance Sheet as of January 31, 2013:
Assets:
Cash $ 24,600
Merchandise inventory 10,300
Store supplies 2,800
Prepaid insurance 800
Current Assets: 38,500
Store equipment 42,900
Accumulated depreciation—
Store equipment (21,625) 21,275
Total Assets $ 59,775
Liabilities + Equity:
Accounts payable $13,000
J. Nelson, Capital 39,000
J. Nelson, Withdrawals (2,100
)
Net Income $ 9,875
Total Liabilities + Equity $ 59,775
a) The current ratio of Nelson Company is a metric that assesses the company’s capability to settle short-term obligations using short-term assets. It reflects the ratio of current assets to current liabilities.
b) The acid-test ratio of Nelson eliminates those elements that could hinder the rapid conversion of current assets into liquidity for the purpose of fulfilling short-term liabilities. In this instance, inventory, store supplies, and prepaid insurance are omitted.
c) Nelson maintains a strong gross margin ratio exceeding 60%. This demonstrates its capability to contain the cost of goods sold to below 40%. However, Nelson Company's management struggles to keep period costs in check to achieve a reasonable net income, as it is only able to convert less than 9% of sales for return to J. Nelson.
