Problem 3.5
Brandy Wine Homecare
Income Statement
December 31, 2011
Revenues:
Total revenues $12,000,000
Expenses:
Expenses $9,000,000
Depreciation $1,500,000
Total expenses $10,500,000
Revenue over expenses (Net Income) $1,500,000
- What were Brandywine’s net income, total profit, margin and cash flow?
Net income = Total revenue – Total expenses
= $12,000,000 – $10,500,000
=$1,500,000
Its net income would be $1,500,000
Total profit margin = Net Income / Total Revenues
=1,500,000 / $12,000,000
=0.125 = 12.5%
Its total profit margin is 12.5%
Cash flow = Net Income + Depreciation Expense
= $1,500,000 + $1,500,000
= $3,000,000
Its total cash flow is $3,000,000
- Now, suppose the company changed its depreciation calculation procedures such that its depreciation expense doubled. How would this change affect Brandywine’s net income, total profit margin and cash flow?
Revenue $12,000,000
Total revenue $12,000,000
Expenses:
Depreciation ($1,500,000×2) $3,000,000
Other ($12,000,000 x 75/100) $9,000,000
Total expenses= Depreciation + other expenses
$1,500,000 x 2 + $9,000,000 = $12,000,000
Total revenue – total expenses = Net income or Profit
$12,000,000 – $12,000,000= $0
What were Brandywine’s 2007 net income, total profit margin, and cash flow?
The net income = $0
Total profit margin= $0
Cash flow= $3,000,000
- Suppose the change has halved, rather than doubled, the firm’s depreciation expense. Now, what would be the impact on net income, total profit margin, and cash flow?
Net income = $12,000,000 – $9,000,000 – .75 = $2,250,000
Total profit margin = $2,250,000 / 12,000,000 = 0.188 = 18.8%
Cash flow = $2,250,000 + 0.75 = $3,000,000
Problem 4.5
BestCare HMO
Balance Sheet
June 30, 2011
(in thousands)
Assets
Current Assets:
Cash $2,737
Net premiums receivable $821
Supplies $387
Total current assets $3,945
Net Property and equipment $5,924
Total Assets $9,869
Liabilities and Net Assets
Accounts payable-medical service $2,145
Accrued Expenses $929
Notes Payable $382
Total Current Liabilities $3,456
Long –term debt $4,295
Total liabilities $7,751
Net assets-unrestricted equity $2,118
Total Liabilities and Net Assets $9,869
- How does this balance sheet differ from the one presented in Exhibit 4.1 for Sunnyvale?
The balance sheet differences between BestCare and Sunnyvale are:
-BestCare doesn’t have long and short-term investments.
-Sunnyvales short and long-term investments cover 58,059,000 of their assets.
-BestCare has unrestricted net assets
- What is BestCare’s net working capital for 2011?
Net working capital = Total current assets – total current liabilities
$xxx– $3,456,000
net working capital = xxx
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- What is BestCare’s debt ratio? How does it compare with Sunnyvale’s debt ratio?
Debt ratio = total debt / total assets
$7751/$9869=0.7854 = 78.54%
The debt ratio is less than Sunnyvale’s.
Problem 4.6
Green Valley Nursing Home, Inc.
Balance Sheet
December 31, 2011
Assets
Current Assets:
Cash $ 105,737
Investments $ 200,000
Net patient accounts receivable $ 215,600
Supplies $ 87,655
Total current assets $ 608,992
Property and equipment $ 2,250,000
Less accumulated depreciation $ 356,000
Net property and equipment $ 1,894,000
Total assets $ 2,502,992
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable $ 72,250
Accrued expenses $ 192,900
Notes payable $ 180,000
Total current liabilities $ 445,150
Long-term debt $ 1,700,000
Shareholders’ Equity:
Common stock, $10 par value $ 100,000
Retained earnings $ 257,842
Total shareholders’ equity $ 357,842
Total liabilities and shareholders’ equity $ 2,502,992
- How does this balance sheet differ from the ones presented in Exhibit 4.1 and problem 4.5?
This balance sheet has net premiums receivable line. Those are premiums that are collected through accounts receivable. The notation of a premium signifies a capitation system that receives premiums up front before services are performed.
- What is Green Valley’s net working capital for 2011?
Net working capital = Total current assets – total current liabilities
$608,992 – $72,250
Net working Capital = $536,742
- What is Green Valley’s debt ratio? How does it compare with the debt ratios for Sunnyvale and BestCare?
Debt ratio = total debt / total assets
445,150 / $2,502,992 = 0.1778 = 17.78 %
The debt ratio is less in comparison.
