C4-30 Capstone analytical review of Chapters 2-4. Calculate liquidity and profitability measures and explain various financial statement relationships for an excavation contractor LO 6, 7

[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.

2.)

Required:

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 firms 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?

No

Yes

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.