For the year ended December 31, 2013 Net revenues 32, 200 Cost of services provi
ID: 2498942 • Letter: F
Question
For the year ended December 31, 2013
Net revenues 32, 200
Cost of services provided 11, 400
Depreciation expense 6, 500
Operating Income 14, 300
Interest expense 3, 800
Income tax expense 3, 200
Net income 7, 300
Assets
Cash and short term investment 2, 800
Accounts receivable net 9, 800
Property plant and equipment net 77, 400
Total assets 90,000
Liabilities and stockholders’ equity
Account payable 1, 500
Income taxes payable 1,600
Notes payable long term 47, 500
Paid in capital 10, 000
Retaining earnings 24,900
Total liabilities and stockholders’ equity 90,000
a. the cost of services provided amount included 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 expense? from a conceptual point view should depreciation be considered a cost of providing services?
b. why do you suppose the amounts of depreciation expense and interest expense are a high for gerrard construction co? to which specific balance sheet account should a financial analyst relate these expense?
c. calculate the company average income tax rate (hint you must first determine the earning before taxes)
d. explain why the amount of income tax expenses is different from the amount of income taxes payable
e. calculate the amount of total current assets. why do you suppose this amount is so low relative to total assets
f. why doesnt the company have a Merchandise Inventory account?
g calculate the amount of working capital and the current ratio at Dec 31, 2013 assess the company overall liquidity
h calculate ROI including margin and turnover and ROE for the year ended Dec 31, 2013 assess the company overall profitability . what additional information would you like to have to increase the validity of this assessment
i. calculate the amount of dividends declared and paid during the year ended December 31, 2013 hint do a t account analysis of retained earnings
Explanation / Answer
a) Depreciation is a non-cash item , it doesnot involve any outflow of cash , whereas other operating expenses are cash item that involves outflow of cash , hence depreciation is seperated from other operating expenses. Depreciation is an indirect cost conceptually is should be considered as a cost of providing service. b) The depreciation and interest expense is high because of the high value of Property plant and Equipment (for depreciation is computed on fixed asset) and high Notes payable long term( interest is paid on the long term debts). c) Net income 7300 Add: income tax expense 3200 Earnings before tax 10500 average income tax rate 30.5% (3200/10500)*100 d) Income tax payable account also includes the income tax to be paid for previous year , whereas income tax expenses account is only for the current year hence the amounts are different e) Cash and short term investment 2,800 Accounts receivable net 9,800 Total current assets 12600 This amount is comparative low to total asset as the , Property plant and equipment constitute the major portion of the total assets. f) Because it is service providing company g) Current asset 12600 Current liabilities 3100 (1500+1600) Current ratio= Current asset/Current liabilites 4.06 Working capital=Current asset-current liabilities 9500 company overall liquidity is high as its current ratio is on higher side and has postivie working capital h) ROI= net income/total investment 8.11% 7300/90000*100 ROE= net income/Equity 20.92% 7300/(10000+24900)*100 The overall profitability of the company is high i) opening balance of retained earning - ending balance+current net income