Question

Use the following selected data from Business Solutions’s income statement for the three months ended March 31, 2018, and from its March 31, 2018, balance sheet to complete the requirements below: computer services revenue, \(25,307; net sales (of goods), \)18,693; total sales and revenue, \(44,000; cost of goods sold, \)14,052; net income, \(18,833; quick assets, \)90,924; current assets, \(95,568; total assets, \)120,268; current liabilities, \(875; total liabilities, \)875; and total equity, $119,393.

Required

1. Compute the gross margin ratio (both with and without services revenue) and net profit margin ratio (round the percent to one decimal).

2. Compute the current ratio and acid-test ratio (round to one decimal).

3. Compute the debt ratio and equity ratio (round the percent to one decimal).

4. What percent of its assets are current? What percent are long-term? (Round the percent to one decimal.)

Short answer

1. Gross margin ratio

With service revenue:68.06%

Without service revenue:24.82%

Net profit margin ratio

With service revenue:42.80%

Without service revenue: 100.74%

2. Current ratio:109.22, Acid-test ratio:103.91

3. Debt ratio:0.007, Equity ratio:0.99

4. Percent of current assets:79.46%, Percent of long-term assets: 20.54%

Step-by-step solution

Definition of Financial Ratios

Financial ratios are the ratio used by the company to compare the different line items of the financial statement and depict its financial position.

Gross profit ratio and net profit margin ratio

Gross profit ratio with service revenue:

$\begin{array}{c}\mathbf{G}\mathbf{r}\mathbf{o}\mathbf{s}\mathbf{s}\mathbf{}\mathbf{p}\mathbf{r}\mathbf{o}\mathbf{f}\mathbf{i}\mathbf{t}\mathbf{}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{s}\mathbf{}\mathbf{a}\mathbf{n}\mathbf{d}\mathbf{}\mathbf{r}\mathbf{e}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{u}\mathbf{e}\mathbf{-}\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{}\mathbf{of}\mathbf{}\mathbf{g}\mathbf{o}\mathbf{o}\mathbf{d}\mathbf{s}\mathbf{}\mathbf{s}\mathbf{o}\mathbf{l}\mathbf{d}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{s}\mathbf{}\mathbf{a}\mathbf{n}\mathbf{d}\mathbf{}\mathbf{r}\mathbf{e}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{u}\mathbf{e}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{44}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{052}}{\mathbf{\$}\mathbf{44}\mathbf{,}\mathbf{000}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{68}\mathbf{.}\mathbf{06}\mathbf{\%}\end{array}$

Gross profit ratio without service revenue:

$\begin{array}{c}\mathbf{G}\mathbf{r}\mathbf{o}\mathbf{s}\mathbf{s}\mathbf{}\mathbf{p}\mathbf{r}\mathbf{o}\mathbf{f}\mathbf{i}\mathbf{t}\mathbf{}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{N}\mathbf{e}\mathbf{t}\mathbf{}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{s}\mathbf{-}\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{g}\mathbf{o}\mathbf{o}\mathbf{d}\mathbf{s}\mathbf{}\mathbf{s}\mathbf{o}\mathbf{l}\mathbf{d}}{\mathbf{N}\mathbf{e}\mathbf{t}\mathbf{}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{s}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{18}\mathbf{,}\mathbf{693}\mathbf{-}\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{052}}{\mathbf{\$}\mathbf{18}\mathbf{,}\mathbf{693}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{24}\mathbf{.}\mathbf{82}\mathbf{\%}\end{array}$

Net profit margin with service revenue:

$\begin{array}{c}\mathbf{N}\mathbf{e}\mathbf{t}\mathbf{}\mathbf{p}\mathbf{r}\mathbf{o}\mathbf{f}\mathbf{i}\mathbf{t}\mathbf{}\mathbf{m}\mathbf{a}\mathbf{r}\mathbf{g}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{N}\mathbf{e}\mathbf{t}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{c}\mathbf{o}\mathbf{m}\mathbf{e}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{s}\mathbf{}\mathbf{a}\mathbf{n}\mathbf{d}\mathbf{}\mathbf{r}\mathbf{e}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{u}\mathbf{e}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{18}\mathbf{,}\mathbf{833}}{\mathbf{\$}\mathbf{44}\mathbf{,}\mathbf{000}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{42}\mathbf{.}\mathbf{80}\mathbf{\%}\end{array}$

Net profit margin without service revenue:

$\begin{array}{c}\mathbf{N}\mathbf{e}\mathbf{t}\mathbf{}\mathbf{p}\mathbf{r}\mathbf{o}\mathbf{f}\mathbf{i}\mathbf{t}\mathbf{}\mathbf{m}\mathbf{a}\mathbf{r}\mathbf{g}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{N}\mathbf{e}\mathbf{t}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{c}\mathbf{o}\mathbf{m}\mathbf{e}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{s}\mathbf{}\mathbf{a}\mathbf{n}\mathbf{d}\mathbf{}\mathbf{r}\mathbf{e}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{u}\mathbf{e}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{18}\mathbf{,}\mathbf{833}}{\mathbf{\$}\mathbf{18}\mathbf{,}\mathbf{693}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{100}\mathbf{.}\mathbf{74}\mathbf{\%}\end{array}$

Current ratio and acid test ratio

Calculation of current ratio:

$\begin{array}{c}\mathbf{C}\mathbf{u}\mathbf{r}\mathbf{r}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{C}\mathbf{u}\mathbf{r}\mathbf{r}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}{\mathbf{C}\mathbf{u}\mathbf{r}\mathbf{r}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{}\mathbf{l}\mathbf{i}\mathbf{a}\mathbf{b}\mathbf{i}\mathbf{l}\mathbf{i}\mathbf{t}\mathbf{i}\mathbf{e}\mathbf{s}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{95}\mathbf{,}\mathbf{568}}{\mathbf{\$}\mathbf{875}}\\ \mathbf{=}\mathbf{109}\mathbf{.}\mathbf{22}\end{array}$

Calculation of acid test ratio:

$\begin{array}{c}\mathbf{A}\mathbf{c}\mathbf{i}\mathbf{d}\mathbf{}\mathbf{t}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{Q}\mathbf{u}\mathbf{i}\mathbf{c}\mathbf{k}\mathbf{}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}{\mathbf{C}\mathbf{u}\mathbf{r}\mathbf{r}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{}\mathbf{l}\mathbf{i}\mathbf{a}\mathbf{b}\mathbf{i}\mathbf{l}\mathbf{i}\mathbf{t}\mathbf{i}\mathbf{e}\mathbf{s}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{90}\mathbf{,}\mathbf{924}}{\mathbf{\$}\mathbf{875}}\\ \mathbf{=}\mathbf{103}\mathbf{.}\mathbf{91}\end{array}$

Debt ratio and equity ratio

Calculation of debt ratio:

$\begin{array}{c}\mathbf{D}\mathbf{e}\mathbf{b}\mathbf{t}\mathbf{}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{d}\mathbf{e}\mathbf{b}\mathbf{t}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{875}}{\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{268}}\\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{007}\end{array}$

Calculation of equity ratio:

$\begin{array}{c}\mathbf{E}\mathbf{q}\mathbf{u}\mathbf{i}\mathbf{t}\mathbf{y}\mathbf{}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{e}\mathbf{q}\mathbf{u}\mathbf{i}\mathbf{t}\mathbf{y}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{119}\mathbf{,}\mathbf{393}}{\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{268}}\\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{99}\end{array}$

Percentage of current assets and fixed assets to total assets

Calculation of percentage of current assets to total assets ratio:

$\begin{array}{c}\mathbf{Percent}\mathbf{}\mathbf{of}\mathbf{}\mathbf{current}\mathbf{}\mathbf{assets}\mathbf{=}\frac{\mathbf{Current}\mathbf{}\mathbf{assets}}{\mathbf{Total}\mathbf{}\mathbf{assets}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{95}\mathbf{,}\mathbf{568}}{\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{268}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{79}\mathbf{.}\mathbf{46}\mathbf{\%}\end{array}$

Calculation of percentage of fixed assets to total assets ratio:

$\begin{array}{c}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{c}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{f}\mathbf{i}\mathbf{x}\mathbf{e}\mathbf{d}\mathbf{}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}\mathbf{=}\frac{\mathbf{F}\mathbf{i}\mathbf{x}\mathbf{e}\mathbf{d}\mathbf{}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{268}\mathbf{-}\mathbf{\$}\mathbf{95}\mathbf{,}\mathbf{568}}{\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{268}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{20}\mathbf{.}\mathbf{54}\mathbf{\%}\end{array}$$\begin{array}{c}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{c}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{f}\mathbf{f}\mathbf{i}\mathbf{x}\mathbf{e}\mathbf{d}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}\mathbf{=}\frac{\mathbf{F}\mathbf{i}\mathbf{x}\mathbf{e}\mathbf{d}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{268}\mathbf{-}\mathbf{\$}\mathbf{95}\mathbf{,}\mathbf{568}}{\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{268}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{20}\mathbf{.}\mathbf{54}\mathbf{\%}\end{array}$