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 company’s average income tax rate.

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 doesn’t the company have a Merchandise Inventory account?

g. Calculate the amount of working capital and the current ratio at December 31, 2010. Assess the company’s overall liquidity.

h. Calculate ROI (including margin and turnover) and ROE for the year ended December 31, 2010. Assess the company’s 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.