Answer problems 3.2 3.3 3.5 3.6 Problems 3.1 Entries for the Warren Cli

Answer problems 3.2 3.3 3.5 3.6

Problems

3.1 Entries for the Warren Clinic 2007 income statement are listed below in

alphabetical order. Reorder the data in proper format.

Bad debt expense $ 40000

Depreciation expense 90000

General/administrative expenses 70000

Interest expense 20000

Interest income 40000

Net income 30000

Other revenue 10000

Patient service revenue 440000

Purchased clinic services 90000

Salaries and bene%uFB01ts 150000

Total revenues 490000

Total expenses 460000

3.2 Consider the following income statement:

BestCare HMO

Statement of Operations

Year Ended June 30 2007

(in thousands)

Revenue:

Premiums earned $26682

Coinsurance 1689

Interest and other income 242

Total revenues $28613

Expenses:

Salaries and bene%uFB01ts $15154

Medical supplies and drugs 7507

Insurance 3963

Provision for bad debts 19

Depreciation 367

Interest 385

Total expenses $27395

Net income $ 1218

a. How does this income statement differ from the one presented in

Table 3.1?

b. Did BestCare spend $367000 on new %uFB01xed assets during %uFB01scal year

2007? If not what is the economic rationale behind its reported

c. Explain the provision for bad debts entry.

d. What is BestCare%u2019s total pro%uFB01t margin? How can it be interpreted?

3.3 Consider this income statement:

Green Valley Nursing Home Inc.

Statement of Income

Year Ended December 31 2007

Revenue:

Net patient service revenue $3163258

Other revenue 106146

Total revenues $3269404

Expenses:

Salaries and bene%uFB01ts $1515438

Medical supplies and drugs 966781

Insurance and other 296357

Provision for bad debts 110000

Depreciation 85000

Interest 206780

Total expenses $3180356

Operating income $ 89048

Provision for income taxes 31167

Net income $ 57881

a. How does this income statement differ from the ones presented in

Table 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%u2019s total pro%uFB01t margin? How does this value

compare with the values for Sunnyvale Clinic and BestCare?

d. The before-tax pro%uFB01t margin for Green Valley is operating income

divided by total revenues. Calculate Green Valley%u2019s before-tax pro%uFB01t

margin. Why may this be a better measure of expense control when

comparing an investor-owned business with a not-for-pro%uFB01t business?

3.5 Brandywine Homecare a not-for-pro%uFB01t business had revenues of $12

million in 2007. 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%u2019s 2007 income statement.

b. What were Brandywine%u2019s net income total pro%uFB01t margin and cash

%uFB02ow?

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%u2019s net income

total pro%uFB01t margin and cash %uFB02ow?

d. Suppose the change had halved rather than doubled the %uFB01rm%u2019s

depreciation expense. Now what would be the impact on net income

total pro%uFB01t margin and cash %uFB02ow?

3.6 Assume that Mainline Homecare a for-pro%uFB01t 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 income. Assuming that the

same revenues and expenses reported for %uFB01nancial accounting purposes

would be reported for tax purposes redo Problem 3.5 for Mainline.