Capstone analytical review of Chapters 2-4. Calculate liquidity and profitability measures and explain various financial statement relationships for an excavation contractor Gerrard Construction Co. is an excavation contractor. The following summarized data (in thousands) are taken from the December 31, 2010, financial statements:

For the Year Ended December 31, 2010:

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

At December 31, 2010:

Assets

Cash and short-term investments

$ 2,800

Accounts receivable, net

9,800

Property, plant, and equipment, net

77,400

Total assets

$90,000

Liabilities and Owners Equity

Accounts payable

$ 1,500

Income taxes payable

1,600

Notes payable (long term)

47,500

Paid-in capital

10,000

Retained earnings

29,400

Total liabilities and owners equity

$90,000

At December 31, 2009, total assets were $82,000 and total owners equity was $32,600. There were no changes in notes payable or paid-in capital during 2010.

Required:

a. 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? From a conceptual point of view, should depreciation be considered a "cost" of providing services?

b. Why do you suppose the amounts of depreciation expense and interest expense are so high for Gerrard Construction Co.? To which specific balance sheet accounts should a financial analyst relate these expenses?

c. Calculate the companys average income tax rate. (Hint: You must first determine the earnings before taxes.)

d. Explain why the amount of income tax expense 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 December 31, 2010. Assess the companys overall liquidity.

h. Calculate ROI (including margin and turnover) and ROE for the year ended December 31, 2010. Assess the companys 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, 2010. (Hint: Do a T-account analysis of retained earnings. )