Healthcare Financial Management Assignment Unit 3 Problem
Ha520 Healthcare Financial Managementassignment Unit 3problem 35 From
Ha520 Healthcare Financial Management assignment Unit 3 problem 35 from pg 114 – Chapter 3. Brandywine Homecare, a not-for-profit business, had revenues of $12 million in 2015. Expenses other than depreciation totaled 75% 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. 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 (still 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. Now, what would be the impact on net income, total profit margin, and cash flow? Problem 4.5 from pg 152, Chapter 4. Consider the following balance sheet: How does this balance sheet differ from the one presented in Exhibit 4.1 for Sunnyvale? What is BestCare’s net working capital for 2015? What is BestCare’s debt ratio? How does it compare with Sunnyvale’s debt ratio? Problem 4.6 from pg 153, Chapter 4. Consider the following balance sheet: How does this balance sheet differ from the ones presented in Exhibit 4.1 and Problem 4.5? What is Green Valley’s net working capital for 2015? What is Green Valley’s debt ratio? How does it compare with the debt ratios for Sunnyvale and BestCare?
Paper For Above instruction
Introduction
Financial management in healthcare organizations involves a comprehensive understanding of income statements, balance sheets, and key financial ratios. These tools enable professionals to analyze operational efficiency, liquidity, and financial stability, which are vital for sustainable healthcare delivery. This paper addresses a case study involving Brandywine Homecare’s income statement and explores the implications of depreciation adjustments on financial metrics. Additionally, a comparative analysis of balance sheets for Sunnyvale, BestCare, and Green Valley will illuminate differences in financial structures and ratios such as net working capital and debt ratio.
Construction and Analysis of Brandywine’s Income Statement
Brandywine Homecare’s revenues for 2015 totaled $12 million. Expenses excluding depreciation amounted to 75% of revenues, which calculates to $9 million (0.75 × 12 million). Depreciation expense was reported as $1.5 million. The income statement for 2015 can be summarized as follows:
- Revenues: $12 million
- Expenses (excluding depreciation): $9 million
- Depreciation expense: $1.5 million
- Total expenses: $10.5 million
- Net income: Revenue minus total expenses = $12 million - $10.5 million = $1.5 million
The net income is therefore $1.5 million. The total profit margin, which indicates the percentage of revenue that remains as profit, is calculated as:
\[
\text{Total profit margin} = \frac{\text{Net income}}{\text{Revenues}} = \frac{\$1.5\text{ million}}{\$12\text{ million}} = 12.5\%
\]
Since all revenues and expenses (excluding depreciation) were cash-based, and depreciation is a non-cash expense, the cash flow can be determined as net income plus depreciation:
\[
\text{Cash flow} = \$1.5\text{ million} + \$1.5\text{ million} = \$3\text{ million}
\]
This indicates that despite net income being $1.5 million, actual cash generated from operations was $3 million.
Impact of Depreciation Adjustment on Financial Metrics
If Brandywine’s depreciation expense doubled within GAAP guidelines, the new depreciation expense would be:
\[
\$1.5\text{ million} \times 2 = \$3\text{ million}
\]
The updated total expenses would be:
\[
\$9\text{ million} + \$3\text{ million} = \$12\text{ million}
\]
and the new net income would be:
\[
\$12\text{ million} - \$12\text{ million} = \$0
\]
This reduction to zero net income causes the total profit margin to drop to 0%. The cash flow, however, remains unaffected because depreciation is a non-cash charge. Therefore, cash flow stays at:
\[
\text{Cash flow} = \text{Net income} + \text{Depreciation} = \$0 + \$3\text{ million} = \$3\text{ million}
\]
Similarly, halving depreciation expenses, for example to $0.75 million, would affect the financial metrics as follows. The net income would increase:
\[
\$12\text{ million} - (\$9\text{ million} + \$0.75\text{ million}) = \$2.25\text{ million}
\]
raising the profit margin to:
\[
\frac{\$2.25\text{ million}}{\$12\text{ million}} = 18.75\%
\]
and cash flow would be:
\[
\$2.25\text{ million} + \$0.75\text{ million} = \$3\text{ million}
\]
The cash flow remains unchanged because it is unaffected by non-cash depreciation adjustments, whereas net income and profit margins are sensitive to depreciation expense variations.
Balance Sheet Analysis of Sunnyvale, BestCare, and Green Valley
The balance sheets for Sunnyvale, BestCare, and Green Valley reveal differences in their financial structure. Sunnyvale’s balance sheet in Exhibit 4.1 highlights a specific composition of assets and liabilities that serve as a benchmark. Comparing it to other entities allows for assessing financial health through ratios such as net working capital and debt ratio.
For BestCare, its net working capital is calculated as current assets minus current liabilities. Suppose the assets and liabilities are represented as:
- Current assets: $5 million
- Current liabilities: $2 million
Thus, the net working capital (NWC) is:
\[
\text{NWC} = \$5\text{ million} - \$2\text{ million} = \$3\text{ million}
\]
The debt ratio, computed as total liabilities divided by total assets, indicates the level of leverage. For example, if total liabilities are $8 million and total assets are $15 million, then:
\[
\text{Debt ratio} = \frac{\$8\text{ million}}{\$15\text{ million}} \approx 53.3\%
\]
This ratio can be compared with Sunnyvale’s data to assess relative financial risk. A higher debt ratio suggests more leverage and potential financial vulnerability.
Regarding Green Valley, with its distinct balance sheet profile, similar calculations of net working capital and debt ratio help evaluate liquidity and leverage. If Green Valley’s current assets are $7 million and current liabilities are $3 million, its NWC is $4 million. If total liabilities are $10 million and total assets $20 million, its debt ratio is 50%. Comparing these ratios across entities reveals differences in financial strategies and risk management.
Conclusion
Analyzing healthcare organizations’ financial statements requires understanding how accounting adjustments, such as depreciation, influence key metrics like net income, profit margins, and cash flow. Doubling depreciation reduces net income to zero without impacting cash flow, illustrating the importance of distinguishing between cash and non-cash expenses. Balance sheet analyses, through ratios like net working capital and debt ratio, provide insights into liquidity and leverage, critical for assessing financial stability. By comparing entities like Sunnyvale, BestCare, and Green Valley, healthcare managers can better understand their financial health and develop strategies for sustainable operations.
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