Question

Please explain how you achieved the solution. I am struggling with what is considered an asset and a liability with this problem. Thank you.

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, and Advertising Expense. It categorizes the remaining expenses as general and administrative.

NELSON COMPANY Unadjusted Trial Balance January 31
	Debit			Credit
Cash	$	22,650
Merchandise inventory		12,500
Store supplies		5,300
Prepaid insurance		2,300
Store equipment		42,500
Accumulated depreciation—Store equipment				$	19,600
Accounts payable					13,000
Common stock					4,000
Retained earnings					32,000
Dividends		2,200
Sales					116,300
Sales discounts		1,900
Sales returns and allowances		2,250
Cost of goods sold		38,000
Depreciation expense—Store equipment		0
Sales salaries expense		14,600
Office salaries expense		14,600
Insurance expense		0
Rent expense—Selling space		8,500
Rent expense—Office space		8,500
Store supplies expense		0
Advertising expense		9,100
Totals	$	184,900		$	184,900

Additional Information:

1. Store supplies still available at fiscal year-end amount to $2,750.
2. Expired insurance, an administrative expense, is $1,600 for the fiscal year.
3. Depreciation expense on store equipment, a selling expense, is $1,575 for the fiscal year.
4. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $11,000 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

assets are the resources that are owned by the company or which can be converted to cash like account receivable and inventories.

liabilities are obligation of company which needs to be paid.like account Payable.

current assets = cash +inventory+supplies+prepaid insurance

=22650+11000+2750+700*

=37,100

*prepaid insurance expired 1600

so prepaid insurance adjusted balance = 2300-1600

=$700

current liability

accounts payable = 13000

current ratio = current assets / current liabilities

=37100/13000

=2.85

acid test ratio

quick asset(cash)/current liabilities

=22650/13000

=1.74

Gross margin ratio = Gross profit/sales

Gross profit = Net Sales-cost of goods sold

=[116300-1900-2250]-[38000+1500]**

=112150-39500

=72650

Gross margin ratio = 72650/112150

=0.65

** cost of goods sold unadjusted =38000

however inventory is found to be 11000$ so adjusted inventory is [12500-11000] 1500$

1500$ are to be adjusted in cost of goods sold.