Question

In this paper, please discuss the following case study. In doing so, explain your approach to the problem, support your approach with references, and execute your approach. Provide an answer to the case study’s question with a recommendation.

Please refer to the attached income statement and balance sheet for the Diamond Gem Cleaning and Maintenance Company. Perform a financial ratio analysis of the company using the following ratios: (1) Gross profit margin, (2) Current ratio, and (3) Debt ratio.

Select significant lines from the financial statements and provide an observation of their trends (Is the account increasing or decreasing in value? What does this mean?)

Draw some conclusions based on your observations.

Support your observations with research, data, and logic. Research should be from at least four sources outside textbook materials and should address financial ratio and trend analysis. Discuss what limitations exist with the informational material provided. What other material would be important to your trend analysis?

Superior papers will do the following:

Provide a financial ratio analysis of the company using: (1) Gross profit margin, (2) Current ratio, and (3) Debt ratio.

Provide a narrative about, and observations of, significant lines from the statements.

Provide conclusions that are supported with research, data and logic.

Provide a brief discussion of what limitations exist with the informational material provided.

Balance Sheet Income Staten Contract Revenues 5,146,862 4,532,519 Contract Costs Gross Profit 614,343 General and Administrative Expenses 322,356 Operating Income 291,987 Other Expense 25,770 Income Before Provision for Income Taxes 266,217 Provision for Income Taxes 115,450 150,767 Net Income 159,867 Retained Earnings, Beginning Balance Net Income 150,767 310,634 Retained Earnings, Ending Balance

Answer 1

1) Calculation of ratios:

Current ratio = Current assets/ current liablities	893868 / 571697	1.56
Gross profit margin = (Contract revenue - contract cost )/ Contract revenue * 100	614343 / 5146862 * 100	12 %
Debt Ratio = Debt / total Equity Debt = Long term and short term debts	744164 / 1189660	0.63

Here we can observe that gross margin is very good in term of contractor as the esclation of clause persist here due to which there is increase / decrease in cost as well as profits. Also there are various conditions and compliances with regards to an contractor. thus taking all things, such margin is very good.

Also we can observe that, there is high amount of receivables which proves that the payment release to the contractors take time and payment is released only after the approval from the concerned person or authority.

Also the only investment of the contractor is in the equipments and no other as can be seen in fixed assets.

As we know that the whenever a contract is released to any contractor, he has to comply with various statutory obligations . One is providing bank guarantee. Thus the money blocked under any contract is very high which reduces the overall profit of the company. Also the release of the payment requires approval from the proper authority.

Thus to fullfillment of the cash requirements, they take credits from banks or financing companies which is reflected in the balance sheet as line of credit on which interest is paid at very high rates.

the other main expense of the contractor is salary to labours which can be seen in administrative expense as the management of the labours and equipemets is a tedious task and you cant say no to giving them wages either daily or weekly as the statuory rule says so. Thus the cash requirement is again fulfilled through financing.

Although it is hard to point out the limitations in the existing data as the data may belong to some new and small contractor who recently started working, But the statement of profit and loss as well as balance sheet can be more appealing if the contract cost can be bifurcated into what expense it consists of such as labour cost, manager cost, overheads etc.

the same can be applied to administrative cost.

Thus a detailed and line wise and item wise distribution of the expense as well as income gives much specific analysis.