11.1
Entries for the Warren Clinic 2008 income statement are listed below in
alphabetical
order.
Reorder the data in the proper format.
Bad
debt expense $ 40,000
Depreciation
expense 90,000
General/administrative
expenses 70,000
Interest
expense 20,000
Interest
income 40,000
Net
income 30,000
Other
revenue 10,000
Patient
service revenue 440,000
Purchased
clinic services 90,000
Salaries
and benefits 150,000
Total
revenues 490,000
Total
expenses 460,000
11.2
Consider the following income statement:
BestCare
HMO
Statement
of Operations
Year
Ended June 30, 2008
(in
thousands)
Revenue:
Premiums
earned $26,682
Coinsurance
1,689
Interest
and other income 242
Total
revenues $28,613
Expenses:
Salaries
and benefits $ 15,154
Medical
supplies and drugs 7,507
Insurance
3,963
Provision
for bad debts 19
Depreciation
367
Interest
385
Total
expenses $27,395
Net
income $ 1,218
a.
How does this income statement differ from the one presented in Table 11.1?
b.
Did BestCare spend $367,000 on new fixed assets during fiscal year 2008? If
not, what is the economic
rationale behind its reported depreciation
expense?
c.
Explain the provision for bad debts entry.
d.
What is BestCare’s total margin? How can it be interpreted?
11.3
Consider this income statement:
Green
Valley Nursing Home, Inc.
Statement
of Income
Year
Ended December 31, 2008
Revenue:
Resident
services revenue $3,163,258
Other
revenue 106,146
Total
revenues $3,269,404
Expenses:
Salaries
and benefits $1,515,438
Medical
supplies and drugs 966,781
Insurance
and other 296,357
Provision
for bad debts 110,000
Depreciation
85,000
Interest
206,780
Total
expenses $3,180,356
Operating
income $ 89,048
Provision
for income taxes 31,167
Net
income $ 57,881
a.
How does this income statement differ from the ones presented in Table 11.1 and
Problem 11.2?
b.
Why does Green Valley show a provision for income taxes while the other two
income statements did not?
c.
What is Green Valley’s total (profit) margin? How does this value compare with
the values for Park Ridge
Homecare Clinic and BestCare?
d.
The before-tax profit margin for Green Valley is operating income divided by
total revenues. Calculate Green
Valley’s before-tax profit margin. Why may
this be a better measure of expense control when comparing an
investor-owned business with a
not-for-profit business?
12.1
Middleton Clinic had total assets of $500,000 and an equity balance of $350,000
at the end of 2007. One year later, at the end of 2008, the clinic had $575,000
in assets and $380,000 in equity. What was the clinic’s dollar growth in assets
during 2008, and how was this growth financed?
12.2
San Mateo Healthcare had an equity balance of $1.38 million at the beginning of
the year. At the end of the year, its equity balance was $1.98 million. Assume
that San Mateo is a not-for-profit organization. What was its net income for
the period?
12.3
Here is financial statement information on four not-for-profit clinics:
Pittman
Rose
Beckman
Jaffe
December
31, 2007:
Assets
$
80,000
$
100,000
g
$
150,000
Liabilities
50,000
d
$
75,000
j
Equity
a
60,000
45,000
90,000
December
31, 2008:
Assets
b
130,000
180,000
k
Liabilities
55,000
62,000
h
80,000
Equity
45,000
e
110,000
145,000
During
2008:
Total
revenues
c
400,000
i
500,000
Total
expenses
330,000
f
360,000
l
Fill
in the missing values labeled a through l.
5.1
Assume that the managers of FortWinston Hospital are setting the price on a new
outpatient service. Here are the relevant data estimates:
Variable
cost per visit – $5.00
Annual
direct fixed costs – $500,000
Annual
overhead allocation – $50,000
Expected
annual utilization – 10,000 visits
a.
What per visit price must be set for the service to break even? To earn an
annual profit of $100,000?
b.
Repeat Part a, but assume that the variable cost per visit is $10.
c.
Return to the data given in the problem. Again repeat Part a, but assume that
direct fixed costs are
$1,000,000.
d.
Repeat Part a assuming both a $10 variable cost and $1,000,000 in direct fixed
costs.
6.1
Consider the following 2008 data for Newark General Hospital (in millions of
dollars):
Simple
Budget
Flexible
Budget
Actual
Results
Revenues
$4.7
$4.8
$4.5
Costs
4.1
4.1
4.2
Profit
0.6
0.7
0.3
a.
Calculate and interpret the two profit variances.
b.
Calculate and interpret the two revenue variances.
c.
Calculate and interpret the two cost variances.
d.
How are the variances related?
9.1
Find the following values for a single cash flow:
a.
The future value of $500 invested at 8 percent for one year
b.
The future value of $500 invested at 8 percent for five years
c.
The present value of $500 to be received in one year when the opportunity cost
rate is 8 percent
d.
The present value of $500 to be received in five years when the opportunity
cost rate is 8 percent
10.1
Great Lakes Clinic has been asked to provide exclusive healthcare services for
next year’s World Exposition. Although flattered by the request, the clinic’s
managers want to conduct a financial analysis of the project. An up-front cost
of $160,000 is needed to get the clinic in operation. Then, a net cash inflow
of $1 million
is
expected from operations in each of the two years of the exposition. However,
the clinic has to pay the organizers of the exposition a fee for the marketing
value of the opportunity. This fee, which must be paid at the end of the second
year, is $2 million.
a.
What are the net cash flows associated with the project?
b.
What is the project’s IRR?
c. Assuming a project cost of capital of 10
percent, what is the project’s NPV?
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