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The following unadjusted trial balance is prepared at fiscal year-end for Nelson Company. Nelson company uses a perpetual inventory system. It categorizes the following accounts as selling expenses: depreciation expense—store equipment, sales salaries expense, rent expense—selling space, store supplies expense, advertising expense. It categorizes the remaining expenses as general and administrative.

NELSON COMPANY Unadjusted Trial Balance January 31
	Debit			Credit
Cash	$	2,850
Merchandise inventory		12,000
Store supplies		5,200
Prepaid insurance		2,600
Store equipment		42,800
Accumulated depreciation—Store equipment				$	16,100
Accounts payable					13,000
J. Nelson, Capital					16,000
J. Nelson, Withdrawals		2,250
Sales					116,300
Sales discounts		2,050
Sales returns and allowances		2,050
Cost of goods sold		38,000
Depreciation expense—Store equipment		0
Sales salaries expense		13,150
Office salaries expense		13,150
Insurance expense		0
Rent expense—Selling space		8,000
Rent expense—Office space		8,000
Store supplies expense		0
Advertising expense		9,300
Totals	$	161,400		$	161,400

Additional Information:

1. Store supplies still available at fiscal year-end amount to $1,950.
2. Expired insurance, an administrative expense, for the fiscal year is $1,500.
3. Depreciation expense on store equipment, a selling expense, is $1,600 for the fiscal year.
4. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,200 of inventory is still available at fiscal year-end.

4. Compute the current ratio, acid-test ratio, and gross margin ratio as of January 31. (Round your answers to 2 decimal places.)

Answer 1

Requirement 4:

i. Current ratio = Current assets ÷ Current liabilities = $17,900 ÷ $13,000 = 1.38

ii. Acid test ratio = Quick assets ÷ Current liabilities = $2,850 ÷ $13,000 = 0.22

iii. Gross profit ratio = Gross profit ÷ Net sales = $72,400 ÷ $112,200 = 0.6453 or 64.53%

Calculations:

Current Assets:
Cash	$2,850
Merchandise inventory	$12,000
Store supplies	$1,950
Prepaid insurance [2600-1500]	$1,100
Total current assets	$17,900
Quick assets:
Cash	$2,850
Total quick assets	$2,850
Current liabilities:
Accounts payable	$13,000
Total current liabilities	$13,000
Sales	$116,300
Sales discount	($2,050)
Sales returns and allowances	($2,050)
Net sales	$112,200
Cost of goods sold [38000+1800]	($39,800)
Gross profit	$72,400