BestCare HMO
BestCare HMO
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3.2 Consider the following income statement:
BestCare HMO
Statement of Operations
Year Ended June 30, 2011
(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 Exhibit 3.1?
b. Did BestCare spend $367,000 on new fixed assets during fiscal year
2011? 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 profit margin? How can it be interpreted?
3.3 Consider this income statement:
Green Valley Nursing Home, Inc.
Statement of Income
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
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 Exhibit 3.1 and Problem
3.2?
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 com-pare with the values for
Sunnyvale Clinic and BestCare?
d. The before-tax profit margin for Green Valley is operating in-come 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?
3.5 Brandywine Homecare, a not-for-profit business, had revenues of $12 million in 2011.
Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was
$1.5 million. All revenues were collected in cash during the year and all expenses other than
depreciation were paid in cash.
a. Construct Brandywine’s 2011 income statement.
b. What were Brandywine’s net income, total profit margin, and cash flow?
c. Now, suppose the company changed its depreciation calculation procedures (still within
GAAP) such that its depreciation expense doubled. How would this change affect Brandywine’s
net income, total profit margin, and cash flow?
d. Suppose the change had halved, rather than doubled, the firm’s de-preciation expense. Now,
what would be the impact on net income, total profit margin, and cash flow?
3.6 Assume that Mainline Homecare, a for-profit corporation, had exactly the same situation as
reported in Problem 3.5. However, Mainline must pay taxes at a rate of 40 percent of pretax
(operating) income. Assuming that the same revenues and expenses reported for financial
accounting pur-poses would be reported for tax purposes redo Problem 3.5 for Mainline.
4.7 Refer to the transactions pertaining to Bayshore Radiology Center pre-sented in this chapter.
Restate the impact of the transactions on Bay-shore’s balance sheet using these data:
Cash $ 800,000 Common stock $1,000,000
Gross fixed assets 200,000
Total assets $1,000,000 Total claims $1,000,000
a. Transaction 2: The $200,000 equipment purchase is made with long-term borrowings instead
of cash.
Cash $ 800,000 Accounts payable $ 20,000
Supplies 20,000 Common stock 1,000,000
Gross fixed assets 200,000
b. Transaction 3: The $20,000 in supplies are purchased with cash in-stead of on trade credit.
Cash $ 800,000 Accounts payable $ 20,000
Accounts receivable 50,000 Common stock 1,000,000
Supplies 20,000 Retained earnings 50,000
Gross fixed assets 200,000
Total assets $1,070,000 Total claims $1,070,000
c. Transaction 4: The $50,000 in services provided are immediately paid for by patients instead
of billed to third-party payers.
