Formulas

• Accounting equation: Assets = Liabilities and Owner's Equity
• Current ratio: current assets/current liabilities
• Acid test ratio: (current assets - inventory)/current liabilities
• Return on equity: net income/total shareholder's equity
• Times interest earned: earnings before interest and taxes/interest expense
• Debt to equity: total liabilities/shareholder's equity
• Profit margin: net income/net sales (or sales if net sales are not available)
• Gross margin: gross profit/sale

• Sources of Cash (Year Over Year)
• Assets - (decrease) Liabilities + (increase) Owner's Equity + (increase)
• Uses of Cash (Year Over Year) Assets + (increase) Liabilities - (decrease) Owner's Equity - (decrease)

QUESTION

Using the following income statement information for HR Solutions Publishing Co., calculate the Gross Margin and Profit Margin and describe why Net Income decreased from 2018 to 2019.

	2019	2018
Sales	720	740
Less: Cost of Goods Sold	150	200
GROSS PROFIT	570	540
Less: Operating Expenses	380	270
EARNINGS BEFORE INTEREST & TAXES	190	270
Less: Interest Expense	82	82
EARNINGS BEFORE TAXES	108	188
Less: Taxes	23	39
Net Income	85	149