. Why does Green Valley show a provision for income taxes while the other two income statements did not?

3.2 Consider the following income statement:

BestCare HMO

Statement of Operations

Year Ended June 30, 2011

(in thousands)

Revenue:

Premiums earned
$26,682

Coinsurance 1,689

Interest and other
income 242

Total revenues
$28,613

Expenses:

Salaries and
benefits $15,154

Medical supplies
and drugs 7,507

Insurance 3,963

Provision for bad
debts 19

Depreciation 367

Interest 385

Total
expenses $27,395

Net income $ 1,218

a. How does this
income statement differ from the one presented in Exhibit 3.1?

b. DidBestCare spend
$367,000 on new fixed assets during fiscal year

2011? If not, what is the economic rationale behind its
reported depreciation expense?

c. Explain the
provision for bad debts entry.

d. What is BestCare’s
total profit margin? How can it be interpreted?

3.3 Consider this income statement:

Green Valley Nursing Home, Inc.

Statement of Income

Year Ended December 31, 2011

Revenue:

Net patient
service revenue $ 3,163,258

Other revenue 106,146

Total
revenues $ 3,269,404

Expenses:

Salaries and
benefits $ 1,515,438

Medical supplies
and drugs 966,781

Insurance and
other 296,357

Provision for bad debts
110,000

Depreciation 85,000

Interest 206,780

Total
expenses $ 3,180,356

Operating income
$ 89,048

Provision for income
taxes 31,167

Net income $ 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?

3.5 Brandywine
Homecare, a not-for-profit business, had revenues of $12 million in 2011.
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’s 2011 income statement.

b. What were
Brandywine’s net income, total profit margin, and cash flow?

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’s net income, total profit margin, and cash flow?

d. Suppose the change
had halved, rather than doubled, the firm’s de-preciation expense. Now, what
would be the impact on net income, total profit margin, and cash flow?

3.6 Assume that
Mainline Homecare, a for-profit 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 (operating) income. Assuming that the same revenues and
expenses reported for financial accounting pur-poses would be reported for tax
purposes redo Problem 3.5 for Mainline.

4.7 Refer to the
transactions pertaining to Bayshore Radiology Center pre-sented in this
chapter. Restate the impact of the transactions on Bay-shore’s balance sheet
using these data:

Cash $ 800,000
Common stock $1,000,000

Gross fixed
assets 200,000

Total assets
$1,000,000 Total claims $1,000,000

a. Transaction 2: The
$200,000 equipment purchase is made with long-term borrowings instead of cash.

Cash $ 800,000
Accounts payable $ 20,000

Supplies 20,000
Common stock 1,000,000

Gross fixed assets 200,000

b. Transaction 3: The
$20,000 in supplies are purchased with cash in-stead of on trade credit.

Cash $ 800,000
Accounts payable $ 20,000

Accounts
receivable 50,000 Common stock
1,000,000

Supplies 20,000 Retained earnings 50,000

Gross fixed
assets 200,000

Total assets
$1,070,000 Total claims $1,070,000

c. Transaction 4: The
$50,000 in services provided are immediately paid for by patients instead of
billed to third-party payers.

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