Average income tax=income tax rate expense/earnings before texes — The management firm would interested knowing amount economic cost asset that being

Financial statement analysis

Name

Institution

Question a

The management of the firm would be interested in knowing the amount of economic cost of asset that is being utilized by the company. It is because a substantial portion of the firm’s profit or returns will be dedicated in replacing machinery and equipment.

The depreciation expense does not affect the financial position of the firm. Yes, depreciation involves the cost of a product or a service or conducting particular business activity. However, cash is not affected by the depreciation adjustments. The wear and tear of long-term assets is due to the reduction of their economic value.

Question b

The company depreciation expense is high since it is a highly capital intensive firm. The interest rate is high due to the large amount of long term debt owned by the firm. The depreciation should relate to plant and property while the interest expense should relate to notes payable in the financial statements.

Question c

Operating income =$14,300

Less: Interest expense= ($3,800

Earnings before tax $10,500

Average income tax=income tax rate expense/earnings before texes

$3,200/10,500=30.5%

Question d

The difference that exist between the income tax expense and income tax payable is due the set of rules used in calculating the income tax expense. The income tax expense calculated based on the generally accepted accounting principles will be therefore different from that calculated based on the company accounting policies and standards.

Question e

Cash and short term investments=$2,800

Add: Account receivable=$9,800

Total current assets=$12,600

The current assets are low in relative terms since construction firms are usually capital intensive.

Question f

The firm is that of an excavation contractor hence the firm provides services to its clients and not selling goods to the customers.

Question g

Working capital =current assets-current liabilities