Chapter 4, Problem 4.30C

To determine

(A)

Expenses accounts for largest portion of the $177 cost for service provided

Answer to Problem 4.30C

In given case, Mr. Gerrard construction co. has large fixed assets investment that is why keeping depreciation expenses separately will show the cash operation accurately.

Explanation of Solution

Given:

We are given with income statement and balance sheet of debauge co. for the year ending December 31 2016.

Concept Used:

Operating expenses: An expense incurred in carrying out an organisation's day-to-day activities, but not directly associated with production. Operating expenses include such things as payroll, sales commissions, employee benefits and pension contributions, transportation and travel, amortisation and depreciation, rent, repairs, and taxes.

Conclusion:

Depreciation should not be considered a cost of providing services because it over states the expenses and increase the cost.

To determine

(B)

Primary reason for not including advertisement expenses as operating expenses

Answer to Problem 4.30C

The reason depreciation expense and interest expense are high because Gerrard construction co. has large fixed asset investment and large long term debt which is note payables.

Balance sheet accounts related to expenses are:-

Depreciation = Property, Plant and Equipment

Interest expenses = Notes payable

Explanation of Solution

Given:

Concept Used:

Operating expenses: An expense incurred in carrying out an organisation's day-to-day activities, but not directly associated with production. Operating expenses include such things as payroll, sales commissions, employee benefits and pension contributions, transportation and travel, amortisation and depreciation, rent, repairs, and taxes.

Conclusion:

In construction firm depreciation expenses is direct expenses.

To determine

(C)

Income tax rate

Answer to Problem 4.30C

Income tax rate $=30.4\%$

  $\begin{array}{l}\text{Income tax rate = }\frac{\text{tax paid}}{\text{earning before tax}}\text{ x 100}\\ \begin{array}{l}=\frac{6400}{21000}\text{ x 100}\hfill \\ =30.4\%\hfill \\ \hfill \\ \text{Operating income }= 28600\hfill \\ \left(\text{-}\right)\text{interest }= \left(7600\right)\hfill \\ \text{Earning before tax}=21000\hfill \end{array}\end{array}$

Explanation of Solution

Given:

Concept Used:

Income tax rate is the percentage at which an individual or corporation is taxed. The tax rate is the tax imposed by the federal government and some states based on an individual's taxable income or a corporation's earnings.

Conclusion:

Interest rate is $30.4\%$

To determine

(D)

Difference between income tax payable and income tax expenses

Answer to Problem 4.30C

Difference between income tax payable and income tax expense is income tax payable is compiled of taxes due to the government within one year on prevailing tax law.

Income tax paid is actual income tax paid for the following year.

Explanation of Solution

Given:

Concept Used:

Income tax payable and income tax income

Conclusion:

Income tax paid is actual income tax paid and income tax payable is income tax assessed during the year.

To determine

(E)

Total current assets

Answer to Problem 4.30C

Total current asset $=25200$

The reason why amount is comparatively low because Gerrard construction co. works as contractors and provide services.

TCA= cash + accounts receivables

  $\begin{array}{l}=5600+19600\hfill \\ =25200\hfill \end{array}$

Explanation of Solution

Given:

Concept Used:

Total current assets: Total current assets are the sum of cash, accounts receivable, inventory and supplies. Other assets that appear in the balance sheet are called long-term or fixed assets because they're durable and will last more than one year

Conclusion:

The reason why amount is comparatively low because Gerrard construction co. works as contractors and provide services.

To determine

(F)

Gerrard construction co. doesn't have merchandise Inventory account.

Answer to Problem 4.30C

The reason Gerrard construction co. doesn't have merchandise Inventory account because they deal with contracts and providing service

Explanation of Solution

Given:

Concept Used:

The part of the balance-of-payments accounts referring to visible trade, or merchandise imports and exports.

Conclusion:

The reason Gerrard construction co. doesn't have merchandise Inventory account because they deal with contracts and providing service

A corporation can have an unlimited number of investors. Shares of stock can be sold. The entity continues to exist beyond the deaths of the owners. Owners can receive tax-free benefits such as deductions for retirement plans and insurance.

To determine

(G)

Working capital and current ratio

Answer to Problem 4.30C

Working capital $=19000$

Current ratio $=4.06$

The current ratio indicates that company's liquidity position is good

  $\text{Working capital = CA- CL}$

  $\begin{array}{l}=25200-6200\hfill \\ =19000\hfill \\ \text{Current ratio= }\frac{\text{CA}}{\text{CL}}\hfill \\ =25200/6200\hfill \\ =4.06\hfill \end{array}$

Explanation of Solution

Given:

Concept Used:

Working capital: the capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.

WC= current assets-current liability

Current ratio: The current ratio is a liquidity ratio that measures whether or not a firm has enough resources to meet its short-term obligations.

Conclusion:

The current ration and working capital shows that company has proper current assets and working capital to work with.

To determine

(H)

ROI and ROE

Answer to Problem 4.30C

ROI $=8.1\%$

ROE $=0.73$

These measures are not so important for firm because there policy is to provide dividend rather than increasing shareholders wealth.

  $\begin{array}{l} \hfill \\ \text{Net profit margin }=\frac{\text{net income}}{\text{sales}}\text{ x }100\hfill \\ =\frac{14600}{64400}\text{ x }100\hfill \\ =22.67\%\hfill \\ \hfill \\ \text{Turnover}=\frac{\text{sales}}{\text{total assets}}\text{ x 100}\hfill \\ =\frac{64400}{180000}\text{x 100}\hfill \\ =35.7\%\hfill \\ \hfill \\ \text{ROI }=\text{ margin x turnover}\hfill \\ =\left(0.227\text{ x }0.3577\right)\text{ x }100\hfill \\ =8.1\%\hfill \\ \hfill \\ \text{ROE}=\frac{\text{net income}}{\text{equity shareholder}}\hfill \\ =\frac{14600}{20000}\text{ x 100}\hfill \\ =\text{ 0}.73\text{ times}\hfill \end{array}$

Explanation of Solution

Given:

Concept Used:

Return on investment: Return on investment is a ratio between the net profit and cost of investment resulting from an investment of some resources. A high ROI means the investment's gains favourably to its cost.

Return on equity: In corporate finance, the return on equity is a measure of the profitability of a business in relation to the equity, also known as net assets or assets minus liabilities. ROE is a measure of how well a company uses investments to generate earnings growth.

Dividend: part of a company's profits that is paid to the people who own shares in it (shareholders)

Conclusion:

The rate of return is which is good and the rate on return on equity is $0.73$ times which is also good.

To determine

(I)

Amount of dividend declared

Answer to Problem 4.30C

Amount of dividend declare $=1800$

Dividend payout ratio $=12.3\%$

  $\begin{array}{ll}\text{Dr}.\hfill & \text{Cr}.\hfill \\ \text{Profit and loss account} 12800\hfill & \text{Opening balance} 45200\hfill \\ \text{Closing balance } 5800\hfill & \hfill \end{array}$

  $\begin{array}{l}\text{Dividend paid }=\text{ net income }–\text{ transferred to retained earning}\hfill \\ =14600-12800\hfill \\ =1800\hfill \\ \hfill \\ \text{Dividend payout ratio }=12.3\%\hfill \\ \hfill \end{array}$

Explanation of Solution

Given:

Concept Used:

Return on equity: In corporate finance, the return on equity is a measure of the profitability of a business in relation to the equity, also known as net assets or assets minus liabilities. ROE is a measure of how well a company uses investments to generate earnings growth.

Dividend: part of a company's profits that is paid to the people who own shares in it (shareholders)

Conclusion:

Amount of dividend declare $=1800$

Dividend payout ratio $=12.3\%$