Background American Construction, Inc. (American) begins operations on April 1,
ID: 2418817 • Letter: B
Question
Background
American Construction, Inc. (American) begins operations on April 1, 2004 as a general corporation. (Fiscal period for the company ends March 31.) The company operates as a general contractor engaged in commercial and institutional building construction. The company provides construction services to construct structures such as schools, low-rise office buildings, restaurants, malls and retail stores, and office-warehousing facilities. In addition, the company actively seeks work for remodel and restoration of commercial and institutional facilities as noted above. The company self-performs concrete, steel, masonry, and carpentry work. All other work is subcontracted.
During the first three years of operation, the company experiences rapid growth thanks to strong markets that reduced the effects of price competition. The growth is supported by sound financial backing from the sale of stock to the principal owners, retained earnings and the acquisition of long term debt. Strong financial statements coupled with seemingly good management expertise allow the company’s bonding capacity to peak at $20,000,000 annual revenue as of March 31, 2007.
The fiscal period April 1, 2007 to March 31, 2008 shows a slow down in construction in the local Midwest region where American operates. Company revenue declines from $14,000,000 to $10,000,000. American lowers its price on bid work (mostly new construction) in order to be competitive. In response to American’s poor profit showing for the period ending March 31, 2008, the surety company reduces American’s bonding capacity to $8,000,000 annual revenue.
Currently American’s management is concerned about American’s poor profit showing. The team needs to determine the financial state of the company and wants to track this financial state over the last four years. The balance sheets for the last four years are shown in Table 3.9 and the income statements are shown in Table 3.10. Among other issues, management needs to determine how bad the current financial condition of the company might be and what can be done to turn the company around.
Once the management decides courses of action that need to be taken, the company can prepare a budgeted income statement for the coming fiscal year. The budget will be used to develop overhead and profit mark-up rates for bid work as well as time and material work. The budget will be used to control company operating expense, as well as prepare the company cash flow projection.
Table 3.9. Balance sheets for American Construction, Inc.
Account
3/31/2005
3/31/2006
3/31/2007
3/31/2008
Cash
200,000
280,000
390,000
160,000
Accounts Receivable
650,000
1,104,000
3,400,000
2,000,000
Retainage Receivable
50,000
96,000
300,000
205,200
Material Inventory
80,000
140,000
170,000
70,000
Under-billings
200,000
420,000
500,000
250,000
Other Current Assets
20,000
30,000
40,000
40,000
Total Current Assets
1,200,000
2,070,000
4,800,000
2,725,200
Equipment (Gross)
120,000
216,000
360,000
360,000
Less: Acc. Dep.
24,000
67,200
139,200
211,200
Equipment (Net)
96,000
148,800
220,800
148,800
Building (Gross)
60,000
60,000
60,000
60,000
Less: Acc. Dep.
3,000
6,000
9,000
12,000
Building (Net)
57,000
54,000
51,000
48,000
Land
47,000
47,000
47,000
47,000
Total Non-Current Assets
200,000
249,800
318,800
243,800
Total Assets
1,400,000
2,319,800
5,118,800
2,969,000
Equities
Liabilities
Account Payable
100,000
200,000
560,000
475,000
Subcontracts Payable
200,000
430,000
1,270,000
400,000
Retainage Payable
20,000
50,000
170,000
75,000
Over-billings
100,000
200,000
600,000
700,000
Note Payable (current)
100,000
150,000
300,000
150,000
Income Tax Payable
28,000
40,000
58,000
<14,000>
Current Portion (L/T/D)
40,000
64,000
200,000
100,000
Other Current Liability
12,000
16,000
42,000
14,000
Total Current Liability
600,000
1,150,000
3,200,000
1,900,000
Long Term Debt
100,000
389,800
818,800
145,000
Total Liability
700,000
1,539,800
4,018,800
2,045,000
Net Worth
Capital Stock
650,000
650,000
840,000
700,000
Retained Earnings
50,000
130,000
260,000
224,000
Total Net Worth
700,000
780,000
1,100,000
924,000
Total Equities
1,400,000
2,319,800
5,118,800
2,969,000
Table 3.10. Income statements for American Construction, Inc.
2005
2006
2007
2008
Account
$
$
$
$
Earnings
4,000,000
7,000,000
14,000,000
10,000,000
Cost of Construction
Labor
640,000
1,120,000
2.240,000
1,600,000
Material
1,600,000
2,800,000
5,600,000
4,000,000
Subcontracts
960,000
1,890,000
4,480,000
3,200,000
Other Direct Cost (JOH)
80,000
140,000
280,000
200,000
Total Direct Cost
3,280,000
5,950,000
12,600,000
9,000,000
Gross Profit
720,000
1,050,000
1,400,000
1,000,000
Operating Expense
Variable Operating Expense
Auto and Truck
60,000
105,000
210,000
150,000
Communications
24,000
42,000
84,000
60,000
Interest (Work in progress)
40,000
70,000
140,000
100,000
Insurance (Work in progress)
136,000
196,000
204,200
237,000
Other Variable Expense
8,000
14,000
28,000
20,000
Total Variable Expense
268,000
427,000
666,200
567,000
Fixed Operating Expense
Contributions
9,000
7,000
5,000
5,000
Depreciation (Equipment)
24,000
43,200
72,000
72,000
Depreciation (Building)
3,000
3,000
3,000
3,000
Insurance (Equipment)
8,000
18,000
27,000
29,000
Interest (Equipment)
8,000
14,000
28,000
20,000
Rent
36,000
40,000
44,000
44,000
Salaries
246,000
334,800
334,800
300,000
Other Fixed Expense
18,000
20,000
10,000
10,000
Total Fixed Operating Exp.
352,000
480,000
523,800
483,000
Total Operating Expense
620,000
907,000
1,190,000
1,050,000
Net Profit (before tax)
100,000
143,000
210,000
<50,000>
Tax (28%)
28,000
40,040
58,800
<14,000>
Net Profit (after tax)
72,000
102,960
151,200
<36,000>
Dividends
22,000
22,960
21,200
0
Retained earnings
50,000
80,000
130,000
<36,000>
Requirements
As a member of American’s management team, and the only one who knows anything about analyzing company financial statements (not an uncommon occurrence), it is your responsibility to determine the financial strengths and weakness of the company. Most importantly, the owners of the company are concerned about the risk of their investment. You may perform the following analyses using Excel spreadsheets.
1. Perform a horizontal analysis of the balance sheet for the period ending March 31, 2007 by comparing the ending balance to the beginning balance for this fiscal period with the spreadsheet shown below (Hint: Please refer to Pages 3-9, 3-10, and 3-11):
3/31/2007
3/31/2006
Change
Change
Account
$
$
$
%
2. Perform a vertical analysis on the income statement for the period ending March 31, 2008. (Hint: Please refer to Pages 3-15 and 3-16)
3. Use the completed vertical analysis for the period ending March 31, 2008 and the cost-volume-profit analysis to answer the following questions. (Hint: Please refer to Pages between 3-16 and 3-21)
a. What is the actual cost structure for American in 2008? (Hint: Please refer to Page 3-6)
b. Given the cost structure as shown on the income statement, what volume in dollars must be generated for the company to break even? (Hint: Please refer to the example on Pages 3-20 and 3-21)
c. Given the cost structure as shown on the income statement, what volume in dollars must be generated to yield $150,000 net profit before tax?
d. Given the cost structure as shown on the income statement, what volume in dollars must be generated to yield a 1% profit after tax?
4. Perform a trend on the ratios shown in the following table. For aging ratios such as the average age of accounts receivable, the trend will include results from the last three years. For all other ratios, the trend will include all four years. The ratios must appear in a spreadsheet as follows (Hint: Please refer to Pages between 3-23 and 3-33):
Ratio
2005
2006
2007
2008
*Range
**U/F
***Interpretation
CR = CA/CL
QR=(Cash+AR)/CL
WC = CA-CL
AAAR = AAR/R x 365 Days
AAAP = AAP/M x 365 days
D to E = D/E
DFAN = NFA/GFA (equipment)
* Range – give range as stated in the text, if available
**U/F – indicated whether the trend is unfavorable or favorable
*** Interpretation – Defend your selection of favorable or unfavorable. Apply industry norms, if available, for those ratios where a range is not given.
Account
3/31/2005
3/31/2006
3/31/2007
3/31/2008
Cash
200,000
280,000
390,000
160,000
Accounts Receivable
650,000
1,104,000
3,400,000
2,000,000
Retainage Receivable
50,000
96,000
300,000
205,200
Material Inventory
80,000
140,000
170,000
70,000
Under-billings
200,000
420,000
500,000
250,000
Other Current Assets
20,000
30,000
40,000
40,000
Total Current Assets
1,200,000
2,070,000
4,800,000
2,725,200
Equipment (Gross)
120,000
216,000
360,000
360,000
Less: Acc. Dep.
24,000
67,200
139,200
211,200
Equipment (Net)
96,000
148,800
220,800
148,800
Building (Gross)
60,000
60,000
60,000
60,000
Less: Acc. Dep.
3,000
6,000
9,000
12,000
Building (Net)
57,000
54,000
51,000
48,000
Land
47,000
47,000
47,000
47,000
Total Non-Current Assets
200,000
249,800
318,800
243,800
Total Assets
1,400,000
2,319,800
5,118,800
2,969,000
Equities
Liabilities
Account Payable
100,000
200,000
560,000
475,000
Subcontracts Payable
200,000
430,000
1,270,000
400,000
Retainage Payable
20,000
50,000
170,000
75,000
Over-billings
100,000
200,000
600,000
700,000
Note Payable (current)
100,000
150,000
300,000
150,000
Income Tax Payable
28,000
40,000
58,000
<14,000>
Current Portion (L/T/D)
40,000
64,000
200,000
100,000
Other Current Liability
12,000
16,000
42,000
14,000
Total Current Liability
600,000
1,150,000
3,200,000
1,900,000
Long Term Debt
100,000
389,800
818,800
145,000
Total Liability
700,000
1,539,800
4,018,800
2,045,000
Net Worth
Capital Stock
650,000
650,000
840,000
700,000
Retained Earnings
50,000
130,000
260,000
224,000
Total Net Worth
700,000
780,000
1,100,000
924,000
Total Equities
1,400,000
2,319,800
5,118,800
2,969,000
Explanation / Answer
1) Change in Accounts
Account
3/31/2006
3/31/2007
Cash
280,000
390,000
Accounts Receivable
1,104,000
3,400,000
Retainage Receivable
96,000
300,000
Material Inventory
140,000
170,000
Under-billings
420,000
500,000
Other Current Assets
30,000
40,000
Total Current Assets
2,070,000
4,800,000
Equipment (Gross)
216,000
360,000
Less: Acc. Dep.
67,200
139,200
Equipment (Net)
148,800
220,800
Building (Gross)
60,000
60,000
Less: Acc. Dep.
6,000
9,000
Building (Net)
54,000
51,000
Land
47,000
47,000
Total Non-Current Assets
249,800
318,800
Account Payable
200,000
560,000
Subcontracts Payable
430,000
1,270,000
Retainage Payable
50,000
170,000
Over-billings
200,000
600,000
Note Payable (current)
150,000
300,000
Income Tax Payable
40,000
58,000
Current Portion (L/T/D)
64,000
200,000
Other Current Liability
16,000
42,000
Long Term Debt
389,800
818,800
Total Liability
1,539,800
4,018,800
Capital Stock
650,000
840,000
Retained Earnings
130,000
260,000
Note : Ask other parts separately referring that solve 2nd to 4th part.
Account
3/31/2006
3/31/2007
Change % ChangeCash
280,000
390,000
110,000 39.28Accounts Receivable
1,104,000
3,400,000
2,296,000 207.97Retainage Receivable
96,000
300,000
204,000 212.5%Material Inventory
140,000
170,000
30,000 21.43Under-billings
420,000
500,000
80,000 19.04Other Current Assets
30,000
40,000
10,000 33.33Total Current Assets
2,070,000
4,800,000
2,730,000 131.88Equipment (Gross)
216,000
360,000
144,000 66.66Less: Acc. Dep.
67,200
139,200
72,000 107.14Equipment (Net)
148,800
220,800
72,000 48.38Building (Gross)
60,000
60,000
0 0Less: Acc. Dep.
6,000
9,000
3,000 50Building (Net)
54,000
51,000
- 3,000 - 5.55Land
47,000
47,000
0 0Total Non-Current Assets
249,800
318,800
69,000 27.62Account Payable
200,000
560,000
360,000 180Subcontracts Payable
430,000
1,270,000
840,000 195.35Retainage Payable
50,000
170,000
120,000 240Over-billings
200,000
600,000
400,000 200Note Payable (current)
150,000
300,000
150,000 100Income Tax Payable
40,000
58,000
18,000 45Current Portion (L/T/D)
64,000
200,000
136,000 212.5Other Current Liability
16,000
42,000
26,000 162.5Long Term Debt
389,800
818,800
429,000 110.05Total Liability
1,539,800
4,018,800
2,479,000 161Capital Stock
650,000
840,000
190,000 29.23Retained Earnings
130,000
260,000
130,000 100Related Questions
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