Diamond Gem

Information on an income statement will reflect the profitability of a company in regards to their operating expenses. In order to find the gross profit margin you must take the gross profit and divided it by the net sales (accountingcoach.com). When looking at the gross profit margin for the Diamond Gem Cleaning Company you are able to see that there is a profit margin of 11.94% ( gross profit 614,343/ contract revenues 5,146,862 = 11.94%) the 11.94 % . With a low profit margin of 11.94% it reflects that the Diamond Gem Company could incur a higher amount in regards to meeting their obligations, but also shows that the net income of the company has the potential of being low as well.

Current ratio measures the company’s ability to pay their current liabilities and or short term obligations from the assets they may have borrowed (Heisinger &Hoyle). The proper formula to use when trying to determine the current ratio one must take the current assets and divide them by the current liabilities. From the information provided on the balance income sheet we know that the current assets total 893,868 and that the current liabilities total 571,697 (893,868/ 571,697= 1.56). The 1.56% we arrive at represents the current ratio for the Diamond Cleaning Company. According to the text an average current ratio should be around 2, and the Diamond Gem Cleaning Company is at a 1.56 showing that their current ratio is below average. Reflecting a below average current ratio could reflect the company could have may run into a problem when making the profit to return their current liabilities in regards to assets.

When trying to figure out the debt ratio you must measure the company’s total liability from the balance sheet and divide the amount of the total assets (Investopedia). The purpose of the debt ratio is to measure the company’s liability as a percentage. This percentage is used to reflect the company’s ability to pay back their total liability from the assets that will come in. For this particular case study the total liabilities are 744,164 and the total assets are 1,180,660 (744,164 /1,180,660= 0.63%). Diamond Gems debt ratio is higher than 50%, which deems them a high risk as they liabilities are 63% showing that they have a slightly higher leverage than normal.

When viewing Diamond Gem Cleaning companies balance sheets it is revealed that the company current assets are on the higher end of the spectrum. Through the information provided on the balance sheets given information reveals that the company’s total assets amount to 893,868, which represents 75.71% of their total assets (893,868 total current assets / total assets 1,180,660 = 75.71). The balance sheet is also able to show the contracts receivables account for 505,050 or stands for 42.78% (505,050 accounts received/ total assets 1,180,660= 42.78) of the Diamond Gem’s assets which suggests that their credit sales