Ha520 Healthcare Financial Management Assignment Unit 3 Prob

Ha520 Healthcare Financial Managementassignment Unit 3problem 35 From

Construct Brandywine’s 2015 income statement. What were Brandywine’s net income, total profit margin, and cash flow? Now, suppose the company changed its depreciation calculation procedures within GAAP such that its depreciation expense doubled. How would this change affect Brandywine’s net income, total profit margin, and cash flow? Suppose the change had halved, rather than doubled, the firm’s depreciation expense. What would be the impact on net income, total profit margin, and cash flow?

Paper For Above instruction

Brandywine Homecare, a not-for-profit organization, reported revenues of $12 million in 2015. To accurately evaluate its financial health, it is essential to understand its income statement, net income, profit margins, and cash flows. Additionally, analyzing how changes in depreciation procedures can impact these financial metrics provides insights into the organization's financial flexibility and decision-making processes.

Constructing the 2015 Income Statement

The income statement begins with total revenues and subtracts expenses to arrive at net income. Given that Brandywine's revenues were $12 million and expenses other than depreciation accounted for 75% of revenues, deductible expenses are calculated as:

  • Expenses (excluding depreciation) = 75% of $12 million = $9 million
  • Depreciation expense = $1.5 million

The total expenses are thus:

  • Total expenses = $9 million (other expenses) + $1.5 million (depreciation) = $10.5 million

Net income is derived as:

Net income = Revenues - Total expenses = $12 million - $10.5 million = $1.5 million

Calculating Total Profit Margin and Cash Flow

The total profit margin is the ratio of net income to total revenues:

Profit margin = $1.5 million / $12 million = 12.5%

Since all revenues and expenses (excluding depreciation) are handled in cash, and depreciation is a non-cash expense, the cash flow is computed as:

Cash flow = Net income + Depreciation expense = $1.5 million + $1.5 million = $3 million

Impact of Doubling Depreciation Expense

If Brandywine increases its depreciation expense within GAAP, so that it doubles from $1.5 million to $3 million, the effect on net income is as follows:

  • New net income = Revenues - Expenses (excluding depreciation) - New depreciation
  • = $12 million - $9 million - $3 million = $0

This substantial depreciation increase reduces net income to zero, indicating no profit. The total profit margin consequently drops to:

0 / $12 million = 0%

Cash flow, however, remains unaffected because depreciation is a non-cash expense. Therefore, cash flow continues at:

Cash flow = Net income + Depreciation = $0 + $3 million = $3 million

This scenario reveals that while profit margins decline dramatically with increased depreciation, cash flows are unaffected because they depend on cash transactions, not accounting depreciation.

Impact of Halving Depreciation Expense

If depreciation expense is halved to $0.75 million, then:

  • Net income = $12 million - $9 million - $0.75 million = $2.25 million

The total profit margin increases to:

$2.25 million / $12 million ≈ 18.75%

Cash flow is calculated as:

Cash flow = Net income + Depreciation expense = $2.25 million + $0.75 million = $3 million

Similar to the previous scenarios, cash flow remains unchanged at $3 million, illustrating that depreciation adjustments influence profitability metrics but not cash flows in the short term.

Conclusion

The analysis underscores that depreciation impacts net income and profit margins significantly, yet cash flow remains resilient to such accounting changes. For nonprofit organizations like Brandywine, understanding these distinctions is vital for internal decision-making and external reporting. Adjustments to depreciation methods can obscure or reveal different levels of profitability but do not alter the actual cash position of the organization, which is fundamental for sustenance and operational planning.

References

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  • Samuels, J. M., & Winton, A. (2020). Financial Management for Nonprofit Organizations. Routledge.
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