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Chapter 17
- 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?
- Consider the following financial statements for Best Care HMO, a not-for profit managed care plan
Best Care HMO
Statement of Operations and Changes in Net Assets
Year Ended June 30, 2011
(In thousands)
Revenue:
Premiums earned $26,682
Co-insurance 1,689
Interest and other income 242
Total revenue $28,613
Expense:
Salaries and benefits $15,154
Medical supplies and drugs 7,507
Insurance 3,963
Provision for bad debt 19
Depreciation 367
Interest 385
Total Expenses $27,395
Net income $1,218
Net asset, beginning of year $900
Net assets, end of year $2,118
Best Care HMO
Balance Sheet
June 30, 2011
(In thousands)
Assets
Cash and cash equivalents $2,737
Net premiums receivable 821
Supplies 387
Total current assets $3,945
Net property and equipment’s $5,924
Total assets $9,869
Liabilities and Net Assets
Accounts payable- medical services $2,145
Accrued expenses 929
Notes payable 141
Current portion of long-term debt 241
Total current liabilities $3,456
Long term debt $4,295
Total liabilities $7,751
Net assets (equity) $2,118
Total liabilities and net assets $9,869
a. Perform a Du Point analysis on Best Care. Assume that the industry average ratios are as follows:
Total margin 3.8%
Total assets turnover 2.1
Equity multiplier 3.2
Return on equity (ROE) 25.5%
b. Calculate and interpret the following ratios for Best Care:
Industry Average
Return on assets (ROE) 8.0%
Current ratio 1.3
Days cash on hand 41 days
Average collection period 7days
Debt ratio 69%
Debt to equity ratio 2.2
Time interest earned (TIE) ratio 2.8
Fixed asset turnover ratio 5.2
- 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 $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
Operation income $89,048
Provision for income taxes 31,167
Net income $57,881
Retained earnings, beginning of year $199,961
Retained earnings, end of year $257,842
Green Valley Nursing Home, Inc.
Balance Sheet
December 31, 2011
Assets
Current Assets:
Cash $105,737
Market securities 200,000
Net patient account receivable 215,600
Supplies 87,655
Total current assets &
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