HSA- 525 Health Care Finance Week 5 Homework

Preparation

• Reading(s)
  • Chapter 10: Reporting as a Tool
  • Chapter 11: Financial and Operating Ratios as Performance Measures
  • Chapter 12: The Time Value of Money

• Homework
  • Assignment Exercises 10-1, 10-2, and 10-3 on pages 476 through 479
  • Assignment Exercises 11-1, 11-2, and 11-3 on pages 480 through 481
  • Assignment Exercises 12-1, 12-2, 12-3, 12-4, and 12-5 on pages 482 through 485

Assignment Exercise 10–1: Components of Balance Sheet and Statement of Net Income

Refer to the Metropolis Health System (MHS) financial statements contained in Appendix 28-A. Use the MHS comparative balance sheet, statement of revenue and expenses, and statement of fund balance for this assignment.

Required

Identify the following MHS balance sheet components. List the name of each component and its amount(s) from the appropriate MHS financial statement.

Current Liabilities

Total Assets

Income from Operations

Accumulated Depreciation

Total Operating Revenue

Current Portion of Long-Term Debt

Interest Income

Inventories

Assignment Exercise 10–2: Components of Balance Sheet and Income Statement

Refer to the Metropolis Health System (MHS) balance sheet and statement of revenue and expense in Chapter 28’s MHS Case Study. Patient accounts receivable of $7,400,000 is shown as net of $1,300,000 allowance for bad debts (8,700,000 − 1,300,000 = 7,400,000). (1) What percentage of gross accounts receivable is the allowance for bad debts? (2) If the allowance for bad debts is raised to $1,500,000, where does the extra $200,000 go?

Assignment Exercise 10–3: Components of Balance Sheet and Income Statement

Refer to the Metropolis Health System (MHS) balance sheet and statement of revenue and expense in Chapter 28 MHS Case Study. Property, plant, and equipment of $19,300,000 is shown as “net,” meaning net of the reserve for depreciation. If the $19,300,000 is reduced by $200,000 (meaning the reserve for depreciation has risen), what happens on the income statement?

Assignment Exercise 11–1: Liquidity Ratios

Refer to the Metropolis Health System (MHS) case study in Chapter 28.

Required

1. Set up a worksheet for the liquidity ratios.

2. Compute the four liquidity ratios using the Chapter 28 MHS financial statements.

Assignment Exercise 11–2: Solvency Ratios

Refer to the Metropolis Health System (MHS) case study in Chapter 28.

Required

1. Set up a worksheet for the liquidity ratios.

2. Compute the solvency ratios using the Chapter 28 MHS financial statements.

Assignment Exercise 11–3: Profitability Ratios

Refer to the Metropolis Health System (MHS) case study in Chapter 28.

Required

1. Set up a worksheet for the liquidity ratios.

2. Compute the profitability ratios using the Chapter 28 MHS financial statements.

Assignment Exercise 12–1: Unadjusted Rate of Return

Metropolis Health Systems’ Laboratory Director expects to purchase a new piece of equipment. The assumptions for the transaction are as follows:

• Average annual net income = $70,000

• Original investment amount = $410,000

• Unrecovered asset cost at the end of useful life (salvage value) = $41,000

Required

1. Compute the unadjusted rate of return using the original investment amount.

2. Compute the unadjusted rate of return using the average investment method.

Assignment Exercise 12–2: Finding the Future Value (with a Compound Interest Table)

John Whitten is one of the physicians on staff at Metropolis Health System. His practice is six years old. He has set up an office savings account to accumulate the funds to replace equipment in his practice. Today John is trying to figure what his equipment fund will amount to in four more years.

The equipment fund savings account presently has a balance of $63,500 and any interest earned over the next four years will be left in the account. John assumes the annual interest rate will be 5%. How much money will be in the account at the end of four more years?

Required

Compute how much money will be in the account at the end of four more years. (Use the compound interest table found in Appendix 12-B.)

Assignment Exercise 12–3: Finding the Present Value (with a Present-Value Table)

Part 1—Dr. John Whitten is still figuring out his equipment fund. According to his calculations he needs $250,000 to be accumulated six years from now. John is now trying to find the present value of the $250,000. He continues to assume an interest rate of 5%.

Required

Compute the present value of $250,000 accumulated fifteen years from now. Assume an interest rate of 5%. (Use the Present-Value Table found in Appendix 12-A at the back of this chapter.) Part 2—John doesn’t like the answer he gets. What if he can raise the interest rate to 7%? How much difference would that make?

Required

Compute the present value of $250,000 accumulated fifteen years from now assuming an interest rate of 7%. Compare the difference between this amount and the present value at 5%.

Assignment Exercise 12–4: Computing an Internal Rate of Return

Dr. Whitten has decided to purchase equipment that has a cost of $60,000 and will produce a pretax net cash inflow of $30,000 per year over its estimated useful life of six years. The equipment will have no salvage value and will be depreciated by the straight-line method. The tax rate is 50%. Determine Dr. Whitten’s approximate after-tax internal rate of return.

Assignment Exercise 12–5: Payback Period

The MHS Chief Financial Officer is considering alternate proposals for the hospital Radiology department. The Director of Radiology has suggested purchasing one of two pieces of equipment. Machine A costs $15,000 and Machine B costs $12,000. Both machines are estimated to reduce radiology operating costs by $5,000 per year.

Required

Which machine should be purchased? Make your payback calculations to provide the answer.