Question

Mellor Changes in Equity Chapter 3: The 105 this income statement differ from the one presented in a. How does this in are listed Exhibit 3.1? h. Did BestCare spend $367,000 2011? If not, what is the economic rationale behind its reported depreciation expense? Explain the provision for bad debts entry. is BestCare's total profit margin? How can it be interpreted? Consider this income statement: d. What is BestCare Green Valley Nursing Home, Inc. Statement of Income Year Ended December 31, 2011 Revenue: Net patient service revenue Other revenue Total revenues $3,163,258 106,146 $3,269,404 Expenses: Salaries and benefits Medical supplies and drugs Insurance and other Provision for bad debts Depreciation Interest Total expenses Operating income Provision for income taxes Net income $1,515,438 966,781 296,357 110,000 85,000 206,780 $3,180,356 $ 89,048 31,167 $ 57,881 a. How does this income statement differ from the ones presented in Exhibit 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's total profit margin? How does this value com- pare with the values for Sunnyvale Clinic and BestCare? d. The before-tax profit margin for Green Valley is operating in- come divided by total revenues. Calculate Green Valley's before- tax profit margin. Why may this be a better measure of expense control when comparing an investor-owned business with a not- for-profit business? Forks Hospital reported net income for 2011 of $2.4 million on 3.4 Great Forks Hospital
I would like to check my work for problem 3.3 on pg 105 in Healthcare Finance 5th ed. Will someone help?

a) This income statement is different in the fact that their revenue (non-operating revenue) is combined with operating revenue and in Exhibit 3.1 the non-operating revenue is categorized at the bottom. This statement also has an addition of income taxes suggesting that they are investor-owned. This statement is true to the numbers given whereas the previous two statements are listed in thousands.

b) This particular income statement is for a business that is investor owned (for-profit) because of the addition of income taxes which they must pay. The other two statements do no show income taxes being expended.

c) Profit Margin: 57,881/3,269,404=.0177=1.8%; Therefore, 1.8 cents were generated as profit for each dollar of revenue.

d) Before taxes profit margin=89,048/3,269,404=.027=2.7%. This number suggests that the business is indeed controlling their costs and generating enough revenue from their actual operations for patient services.

Answer 1

Solutions:

1. As we know there are two ways of preparing an income statement, One is single step and the other multiple step. Green Valley has presented the income statement in the Single Step Format. Whereas the exhibit has used a multiple step format. Unlike Multiple step, single step does not classify the operating income / expense and Non-Operating income expenses, this leaves the users of the financial statement without a clear picture of the profitability.

2. The provision for taxes show that the Green Valley Nursing home is a investor owned (for profit) and it is a taxable entity. Whereas the others are non-profit entity and the income is exempted from income tax

3. Green Valley Total Profit Margin = Net Income / Total Revenue

= ($57,881 / $3,269,404) * 100

= 1.77 %

4. Green Valley's Before Tax Profit Margin = Operating Income / Total Revenue

= ($89,048 / $3,269,404) * 100

= 2.72 %

The non-profit entity does not have a tax component and hence no income after taxes. So, the data for comparison must be that with the same components. i.e. profit before taxes of one entity must be compared with profit before taxes of the other entity. Otherwise we will not get a clear picture.

Apparently, this is a better a better measure of expense control when comparing with an investor-owned business with not-for-profit business