Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 66

Capstone analytical review of Chapters 9-11. Calculate selected financial ratios and explain financial reporting issues

(Note: Please refer to Case 4.26 on pages 144-145 for the financial statement data needed for the analysis of this case. You should also review the solution to Case 4.26 on the Web site for this text at www.mhhe.com/marshall9e before attempting to complete this case.)

Required:

a.Case 4.26 presents the 2010 income statement and balance sheet for Gerrard Construction Co. What other financial statements are required? What information would these statements communicate that could not be determined by reviewing only the income statement and balance sheet?

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b. Briefly describe the note disclosures that should be provided by Gerrard Construction Co. and explain why note disclosures are considered an integral part of the financial statements.

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c. Assume that the balance of “Accounts Receivable, net” at December 31, 2009, was $8,200. Calculate the following activity measures for Gerrard Construction Co. for the year ended December 31, 2010:

1. Accounts receivable turnover.

2. Number of days’ sales in accounts receivable.

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d. Calculate the following financial leverage measures for Gerrard Construction Co. at December 31, 2010:

1. Debt ratio.

2. Debt/equity ratio.

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e. Gerrard Construction Co. wishes to lease some new earthmoving equipment from Caterpillar on a long-term basis. What impact (increase, decrease, or no effect) would a capital lease of $4 million have on the company’s debt ratio and debt/equity ratio? (Note that these items were computed in part b and do not need to be recomputed for this requirement).

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f. Review the answer to C4.26. i. at this time. Assume that Gerrard Construction Co. had 2,400,000 shares of $1 par value common stock outstanding throughout 2010, and that the market price per share of common stock at December 31, 2010, was $18.75. Calculate the following profitability measures for the year ended December 31, 2010:

1. Earnings per share of common stock.

2. Price/earnings ratio.

3. Dividend yield.

4. Dividend payout ratio.