[The following information applies to the questions displayed below.] Gerrard Construction Co. is an excavation contractor. The following summarized data (in thousands) are taken from the December 31, 2016, financial statements:
For the Year Ended December 31, 2016:
Net revenues $ 64,400
Cost of services provided 22,800
Depreciation expense 13,000
Operating income $ 28,600
Interest expense 7,600
Income tax expense 6,400
Net income $ 14,600
At December 31, 2016:
Assets
Cash and short-term investments $ 5,600
Accounts receivable, net 19,600
Property, plant, and equipment, net 154,800
Total assets $ 180,000
Liabilities and Stockholders’ Equity
Accounts payable $ 3,000
Income taxes payable 3,200
Notes payable (long term) 95,000
Paid-in capital 20,000
Retained earnings 58,800
Total liabilities and stockholders’ equity$ 180,000
At December 31, 2015, total assets were $164,000 and total stockholders’ equity was $65,200. There were no changes in notes payable or paid-in capital during 2016.
a-1. The cost of services provided amount includes all operating expenses (selling, general, and administrative expenses) except depreciation expense. What do you suppose the primary reason was for management to separate depreciation from other operating expenses?
The owners of the firm would be interested in knowing what the approximate "economic" cost of
fixed asset utilization is, because a substantial portion of the firm’s profits will need to be invested
in replacement machinery and equipment.
The depreciation expenditure does not affect the financial position of Gerrard Construction Co.
a-2. From a conceptual point of view, should depreciation be considered a "cost" of providing services?
b-1. Why do you suppose the amounts of depreciation expense and interest expense are so high for Gerrard Construction Co.? (Select all that apply.)
Depreciation expense is high because Gerrard Construction Co. is a highly capital-intensive firm.
Depreciation expense is high because the firm has a large amount of long-term debt.
Interest expense is high because the firm has a large amount of long-term debt.
Interest expense is high because Gerrard Construction Co. is a highly capital-intensive firm.
b-2. To which specific balance sheet accounts should a financial analyst relate these expenses?
Depreciation should be related to property, plant, and equipment, and interest should be related to notes payable.
Interest should be related to property, plant, and equipment, and depreciation should be related to notes payable.
c. Calculate the company’s average income tax rate. (Hint: You must first determine the earnings before taxes.)(Round your answer to 1 decimal place. (e. g., 32.1))
average income tax rate=
e. Calculate the amount of total current assets. (Enter your answer in whole dollars (Example - enter 20,000,000 and not 20,000))
cash and shourt-term investments=
accounts receivable net=
total current assets=
f. Why doesn’t the company have a Merchandise Inventory account?
As an excavation contractor, the firm sell goods to its customers, but does not provide services.
As an excavation contractor, the firm provides services to its customers, but does not sell goods.
g-1. Calculate the amount of working capital and the current ratio at December 31, 2016. (Enter your answers in whole dollars (Example - enter 20,000,000 and not 20,000). Round your ratio answer to 2 decimal places. (e. g., 32.16))
working capital=
current ratio=
g-2. Assess the company's overall liquidity.
The company's overall liquidity is good
The company's overall liquidity is bad
h. Calculate ROI (including margin and turnover) and ROE for the year ended December 31, 2016. (Round "Turnover" answer to 2 decimal places and other answer to 1 decimal place.)
roi=
margin=
turnover=
roe=
I. Calculate the amount of dividends declared and paid during the year ended December 31, 2016. (Hint: Do a T-account analysis of retained earnings.) (Enter your answers in whole dollars (Example - enter 20,000,000 and not 20,000).)
divdends dectared and paid=