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Financial statement for a health care organization

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Financial statement for a health care organization essay assignment

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16.1 – On a typical day, Park Place Clinic writes $1,000 in checks. It generally takes four days for those
checks to clear. Each day the clinic typically receives $1,000 in checks that take three days to clear. What is
the clinics average net float?
16.2 – Drugs ‘R Us operates a mail order pharmaceutical business on the West Coast. The firm receives an
average of $325,000 in payments per day. On average, it takes four days for the firm to receive payment,
from the time customers mail their checks to the time the firm receives and processes them. A lockbox
system that consists of 10 local depository banks and a concentration bank in San Francisco would cost
$6,500 per month. Under this system, customers’ checks would be received at the lockbox locations one
day after they are mailed, and the daily total would be wired to the concentration bank at a cost of $9.75
each. Assume that the firm could earn 10 percent on marketable securities and that there are 260 working
days and hence 260 transfers from each of the ten lockbox locations per year.
(a) What is the total annual cost of operating the lockbox system?
(b) What is the dollar benefit of the system to Drugs ‘R Us?
(c) Should the firm initiate the lockbox system?
16.4 – Langley Clinics, Inc., buys $400,000 in medical supplies each year (at gross prices) from its major
suppliers, Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is
paying the supplier the full amount due on Day 45, but it is considering taking the discount, paying on Day
10, and replacing the trade credit with a bank loan that has a 10 percent annual cost.
(a) What is the amount of free trade credit that Langley obtains from Consolidated Services?
(Assume 360 days per year throughout this problem)
(b) What is the amount of costly trade credit?
(c) What is the approximate annual cost of the costly trade credit?
(d) Should Langley replace its trade credit with the bank loan? Explain your answer.
(e) If the bank loan is used, how much of the trade credit should be replaced?
16.5. – Milwaukee surgical supplies, Inc., sells on terms of 3/10, net 30. Gross sales for the year are
$1,200,000, and the collections department estimates that 30 percent of the customers pay on the tenth day
and take discounts, 40 percent pay on the thirtieth day and the remaining 30 percent pay, on average, 40
days after the purchase (Assume 360 days per year.)
(a) What is the firm’s average collection period?
(b) What is the firm’s current receivables balance?
(c) What would be the firm’s new receivables balance if Milwaukee Surgical toughened up on its
collection policy with the result that all nondiscount customers paid on the 30th day?
(d) Suppose that the firm’s cost of carrying receivables was 8 percent annually. How much would
the toughened credit policy save the firm in annual receivables carrying expense? (Assume that
the entire amount of receivables had to be financed.)
17.1 – (a) Modern Medical Devices has a current ratio of 0.5. Which of the following actions would
improve (i.e., Increase) this ratio?
• Use cash to pay off current liabilities
• Collect some of the current accounts receivable
• Use cash to pay off some long term debt
• Purchase additional inventory on credit (i.e., accounts payable).
• Sell some of the existing inventory at cost.
(b) Assume that the company has a current ratio of 1.2. Now which of the above actions would
improve this ratio?
17.4 – Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan:

BestCare HMO

Statement of Operations and Change in Net Assets
Year Ended June 30, 2011
(in thousands)
Revenue:
Premiums earned
Coinsurance
Interest and other income
Total revenue
Expenses:
Salaries and benefits
Medical supplies and drugs
Insurance
Provision for bad debts
Depreciation
Interest
Total expenses
Net income
Net assets, beginning of year
Net assets, end of year

$26,682
$1,689
$242
$28,613
$15,154
$7,507
$3,963
$19
$367
$385
$27,395
$1,218
$900
$2,118
BestCare HMO
Balance Sheet
Year Ended June 30, 2011
(in thousands)

Assets
Cash and cash equivalents
Net premiums receivable
Supplies
Total current assets
Net property and equipment
Total assets

$2,737
$821
$387
$3,945
$5,924
$9,869

Liabilities and Net Assets
Accounts payable – medical services
Accrued expenses
Notes payable
Current portion of long-term debt
Total current liabilities
Long-term debt
Total liabilities
Net assets (equity)
Total liabilities and net assets

$2,145
$929
$141
$241
$3,456
$4,295
$7,751
$2,118
$9,869

a. Perform a Du Pont analysis on BestCare. Assume that the
industry average ratios are as follows:
Total margin
3.8%

Total asset turnover
Equity multiplier
Return on equity (ROE)

2.1
3.2
25.5%

b. Calculate and interpret the following ratios for BestCare:
Industry average
Return on assets (ROA)
Current ratio
Days cash on hand
Average collection period
Debt ratio
Debt-to-equity ratio
Times interest earned (TIE) ratio
Fixed asset turnover ratio

8.0%
1.3
41 days
7 days
69%
2.2
2.8
5.2

17.5 – Consider the following financial statements for Green Valley Nursing Home, Inc., a for-profit, long
term care facility:
Green Valley Nursing Home, Inc.
Statement of Income and Retained Earnings
Year Ended December 31, 2011
Revenue:
Net patient service revenue
Other revenue
Total revenues
Expenses:
Salaries and benefits
Medical supplies and drugs
Insurance and other
Provision for bad debts
Depreciation
Interest
Total expenses
Operating income
Provision for income taxes
Net income
Retained earnings, beginning of year
Retained earnings, end of year

$3,163,258
$106,146
$3,269,404
$1,515,438
$966,781
$296,357
$110,000
$85,000
$206,780
$3,180,356
$89,048
$31,167
$57,881
$199,961
$257,842
Green Valley Nursing Home, Inc.
Balance Sheet
Year Ended December 31, 2011

Assets
Current Assets:
Cash
Marketable securities
Net patient accounts receivable
Supplies
Total current assets
Property and equipment

$105,737
$200,000
$215,600
$87,655
$608,992
$2,250,000

Less accumulated depreciation
Net property and equipment
Total assets
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable
Accrued expenses
Notes payable
Current portion of long-term debt
Total current liabilities
Long-term debt
Shareholders’ Equity:
Common stock, $10 par value
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity

$356,000
$1,894,000
$2,502,992

$72,250
$192,900
$100,000
$80,000
$445,150
$1,700,000
$100,000
$257,842
$357,842
$2,502,992

a. Perform a Du Pont analysis on Green Valley. Assume that the industry average ratios are as follows:
Total margin
3.5%
Total asset turnover
1.5
Equity multiplier
2.5
Return on equity (ROE)
13.1%
b. Calculate and interpret the following ratios:
Industry average
Return on assets (ROA)
5.2%
Current ratio
2.0
Days cash on hand
22 days
Average collection period
19 days
Debt ratio
71%
Debt-to-equity ratio
2.5
Times interest earned (TIE) ratio
2.6
Fixed asset turnover ratio
1.4
c. Assume that there are 10,000 shares of Green Valley’s stock outstanding and that some recently sold
for $45 per share.
• What is the firm’s price / earnings ratio?
• What is its market / book ratio?
17.6 – Examine the industry average ratios given in problems 17.4 and 17.5. Explain why the ratios are
different between the managed care and nursing home industries.

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