Accounting essay questions and responses

Accounting

Vertical Analysis

Balance Sheet

Ratio Analysis

Current Ratio

Cash Ratio

X Interest Earned

Debt/Equity

Gross Margin

Operating Margin

Net Margin

There are several relationships that might be worth investigating further. One issue that arises is with the lack of cash on hand, despite high debt. The current ratio is acceptable, but it is all in accounts receivable, which presumably comes from these attornies. But the joint venture information has not been provided, and that is where the most significant issues lie. The joint venture information basically has the company with large accounts receivable, a lot of deferred taxes, and a rapidly growing fixed asset base. It just seems odd that joint venture income is relatively low versus the rapid growth of the business.

Unbilled charges on restorations means that there has been some work done on restorations that has not been billed. This is basically the service industry equivalent of goods-in-process inventory. The company has done some work on a project, and will bill for that work in the future, but as of yet has not billed for that work. Thus, it is not an account receivable yet.

6. The two are not related. Unbilled is work that's been done but for which no bill has yet been created, presumably because billing occurs once work has been completed. Overbilled charges are different. They are a liability that is incurred when the company bills too much. When it bills a client, this becomes accounts receivable, but there may be instances where the company bills the client prior to the work being completed. When the work is completed, it comes in lower than what was billed, so the company has overbilled and will be returning that excess back to the customer. But overbilled and underbilled can and probably do relate to entirely different transactions.

7. Advances on materials is likely material that the ZZZZ has provided to one of its joint ventures. The JV partner obtains financing, but ZZZZ is doing the work, so will advance materials to the JV prior to the work being done. The JV may not yet have paid for those materials.

8. Advances -- Joint Ventures would be capital that's been advanced to the joint venture, rather than materials. Presumably, this is a current asset because the joint venture is going to pay the money back when it obtains its financing, or gets paid for the work.

9.a) Both a/r and advances on materials are current assets. Advances on materials would be materials sent to the joint venture to start the work. The accounts receivable would increase as well, because the joint venture has presumably contracted the work and that means there is payment receivable for ZZZZ. It relates to the materials provided, though there is no particular link between the dollar amounts -- that depends on the nature of the job.

b) An increase in a/r aligns with an increase in sales. The sale is typically made and that creates an account receivable. There should be a fairly linear relationship between the two, though not necessarily one-for-one if the account is settled immediately.