Week 4 Assignment prob

476 EXAMPLES AND EXERCISES, SUPPLEMENTAL MATERIALS, AND SOLUTIONS

CHAPTER 10

Practice Exercise 10-1: Components of Balance Sheet and Statement of Net Income

Financial statements for Doctors Smith and Brown are provided here. Use the doctors', bal­ ance sheet, statement ofrevenue and expenses, and statement ofcapital for this assignment. .'

Required

Ident.ifY the following doctors' balance sheet and statement ofnet income components. List,~, the name of each component and its amount(s) from the appropriate financial statem6jtl':(~, .

Current Liabilities Total Assets

'Income from Operations Accumulated Depreciation Total Operating Revenue Current Portion of Long-Term Debt Interest Income ' Inventories

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

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

Required

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

Current Liabilities Total,Assets Income from Operations Accumulated Depreciation Total Operating Revenue Current Portion ofLong-Term Debt Interest Income Inventories

Chapter 10 477

Doctors Smith and Brown: Statement ofNet Income

for the Three Months Ended March 31, 2_ Revenue

Net patient service revenue Other revenue 180,000

-0­ Total Operating Revenue

"Expenses 180,000

Nursing/PA salaries Clerical salaries Payroll taxes/employee benefits

. Medical supplies and drugs . Professional fees Dues and pUblications

Janitorial seIY!ce Office supplies' Repairs and maintenance

., Utilities and telephone Depreciation

. Interest

16,650 10,150 4,800

15,000 3,000 2,400 1,200 1,500 1,200 6,000

30,000

Other 3,100 5,000

100,000

80,000

..(J~

~o-

80,000

<.

478 EXAMPLES AND EXERCISES, SUPPLEMENTAL MATERIALS, AND SOLUTIONS

Doctors Smith and Brown Balance Sheet March 31, 2_

Assets CurrentAssets

Cash and cash equivalents 25,000 Patient accounts receivable 40,000 Inventories--supplies and drugs 5,000

Total CurrentAssets . 70,000

Property, Plant, and Equipment Buildings and Improvements 500,000 Equipment 800,000

Total 1,300,000 Less Accumulated Depreciation (480,000) Net Depreciable Assets 820,000 Land 100,000

Pwperty, Plant, and Equipment, Net 920,000

Other Assets 10,000

Total Assets 1,000,000

Liabilities and Capital

Current Liabilities Current maturities oflong-tenn 10,000

debt Accounts payable and accrued 20,000

expenses

Total Current Liabilities 30,000

Long~Tenn Debt 180,000 Less Current Portion ofLong-Tenn Debt (10,000) Net Long-Tenn Debt 170,000

Total Liabilities 200,000

Capital 800,000

Total Liabilities and Capital.

Doctors Smith and Brown StatementofChanges in Capital

for the Three Months Ended March 31, 2_

Beginning Balance $720,000 Net Income 80,000 Ending Balance $800,000

1 1 1

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Chapter 10 479

The MHSBalance Sheet

Example lOA: Components ofB'alance Sheet'and Income Statement

The "Accounts Receivable (net)"in Exhibit 10-1 means the accO'unts receivable figure of $250,000 on the balance sheet is net ofthe allowancefor bad debts. Ifthe allowance for bad debts is raised on the balance sheet, then bad debt expense (a.k.a. provision for dO'ubtful

. accO'unts) on the income statement (a.k.a. statement O'frevenue and expense) also rises. Think of these two accounts as a pair.

Practice Exercise 10-II: Components of Balance Sheet and Income Statement .

. Refer to Doctors Smith and Brown's balance sheet, where patient accounts receivable is stated at $40,000: Do you think this figure is net O'f an allowance for bad debts?

,A!iiSi~:nn:leJlt Exercise 10-2: Components of Balance Sheet and Income Statement

. to the Metropolis Health System (MHS) balance sheet and statement of revenue expense in Chapter 28's MHS Case StUdy. Patient accounts receivable O'f$7,400,OOO is

as net of $1,300,000 allowance for bad debts (8,700,000 - 1,300,000 = 7,400,000). What percentage of gross accounts receivable is the allowance fO'r bad debts? . (2) If the

110'w'an<:efor bad debts is raised to $1,500,000, where does the.extra $200,000 go?

QUllple lOB: Componen,ts of Balance Sheet and Income Statement

to Exhibit 10-1 and Exhibit 1 ()..;.2's Westside Clinic statements. The "Property, Plant, (net)" total in Exhibit 10-1 means the prO'perty, plant, and equipment

of$360,000 on the balance sheet is net of the reserve for depreciation. If the reserve ......."aw.v.. is raised on the balance sheet, then the depreciation expense on the

statement (a.k.a. statement of revenue and expense) also rises. Think of these two as another pair.

Exercise 10....ID: Components of Balance Sheet and Income Statement

Doctors Smith and Brown's balance sheet, where buildings and equipment are as net (the $820,000 figure), but land is not. DO' you recall why this is so?

Exercise 10-3: Components of Balance Sheet and Income Statement

the Metropolis Health Sy~tem (MHS) balance sheet and statement ofrevenue and ip. Chapter 28's MHS Case Study. PrO'perty, plant, and equipment of$19,300,000 is "net," meaning net of the reserve for depreciation. If the $19,300,000 is reduced

(meaning the reserve for depreciation has risen), what happens on the income

480 EXAMPLES AND EXERCISES, SUPPLEMENTAL MATERIALS, AND SOLUTIONS

CHAPTER 11

Example llA

To better understand how the information for the numerator and the denominator of each calculation is obtained, Figure 11-1 illustrates the process. This figure takes the bal- ... ance sheet and the statement ofrevenue and expense that were discussed in the preceding ... . chapter and illustrates the source of each figure in the four liquidity ratios. The multiple· . computations in days cash on hand and in days receivables are further broken out into a three-step process to better illustrate sources of information.

Practice Exercise 11-1: Liquidity Ratios

. Two of the liquidity ratios are illustrated in this practice exercise. Refer to Doctors and Brown's financial statements presented in the preceding exercises for Chapter 10.

Required

1. Set up a worksheet for the current ratio and the quick ratio. 2. Compute the ratios for Doctors Smith and Brown.

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

Example lIB

To better understand how the information for the numerator and the UCJl1Ull1j,l each calculation is obtained, Figure li-2 illustrates the process. This figure ance sheet and the statement ofrevenue and expense that were discussed in chapter and illustrates the source of each figure in the two solvency ratios.· computations are further broken out to better explain sources of information; .

Practice Exercise 11-11: Solvency Ratios

Refer to Doctors Smith and Brown's financial statements presented in the cises for Chapter 10.

Chapter 11 481

Required

1. Set up a worksheet for the solvency ratios. 2. Compute these ratios for Doctors Smith and Brown. To do so, you will need one

additional piece of information that is not present on the doctors' statements: their maximum annual debt service is $22,200.

Assignment Exercise 11-2: Solvency Ratios .

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

Required

L Set up a worksheet for the liquidity ratios . . , . 2. Compute the solvency ratios using the Chapter 28 MRS financial statements.

fExiamplle 11C

better understand how the information for the numerator and the denominator of calculation is obtained, study Figure 11-2. This figure takes the balance sheet and the

t~tlte:me:nt of revenue and expense that were discussed in the preceding chapter and illus­ the source of each figure in the two profitability ratios. Any multiple computations

further broken out to better explain sources of informati()n.

W.JmlLcn(~e Exercise II-m: Profitability Ratios.

to Doctors Smith and Brown's financial statements presented in the preceding exer­ Chapter 10.

···Set up a worksheet for the profitability ratios . . Compute these ratios for Doctors Smith and Brown. All the necessary information is present on the doctors' statements. . [Hint: "Operating Income (Loss)" is also known as "Income from Operations."]

Exercise 11-3: Profitability Ratios

the Metropolis Health System (MRS) case study in Chapter 28.

a worksheet for the liquidity ratios. ,,'....~ILJ.L'" the profitability ratios using the Chapter 28 MHS financial statements.

482 EXAMPLES AND EXERCISES, SUPPLEMENTAL MATERIALS, AND SOLUTIONS

CHAPTER 12

Example 12A: Unadjusted Rate of Return

Assumptions

• Average annual net income = $100,000 • Original investment amount = $1,000,000 • Unrecovered asset costat the end of useful life (salvage value) = $100,000

Calculation using original investment amount:

$100,000 = 10% Unadjusted Rate ofReturn

$1,000,000

Calculation using average investment amount:

Step 1: Compute average investment amount for total unrecovered asset cost

At beginningQf estimated useful life = $1,000,000 At end ofestimated useful1ife = $ 100,000

--~.......:,..-..!.......:...:-

Sum $1,100,000

Divided by 2 = $550,000 average investment amount

Step 2: Calculate unadjusted rate of return.

$100,000 = 18.2% Unadjusted Rate ofReturn

$550,000

Practice Exercise 12-1: Unadjusted Rate ofRetum

Assumptions

• Average annual net income = $100,000 • Original investment amount = $500,000 • Unrecovered asset cost at the end ofuseful life (salvage value) = $50,000

Required

1. Compute the unadjusted rate of return using the original investment <UIJLUUp 2. Compute the unadjusted rate of return using the average investmentmc::Ul~)"

Assignment Exercise 12-1: Unadjusted Rate of Return

Metropolis Health Systems' Laboratory Director expects to purchase a new ment. 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 ofuseful life (salvage value) = $41,000 ..

Chapter 12 483

Required

1. Compute the unadjusted rate of return using the original investment amount. . 2. Compute the una<ljusted rate of return using the average investment method..

Example 12B: Finding the Future Value (with a Compound Interest Table)

Betty Dylan is Director of Nurses at Metropolis Health System. Her oldest son will be ~ntering college in five years. Today Betty is trying to figure what His college fund will amount to in five more years. (Hint: Compound interest means interest is not only earned on the principal, but also is earned on the previous interest earnings that have been left in . the account. Interest is thus compounded.)

The college fund savings account presently has. a balance of $9,000 and any interest earned over the nextfive years will be leftin the account. Betty assumes the annual interest tat~will be 6%. How much money will be in the account at the end offive more years?

. Solution to Example

Step 1. Refer to the Compouhd Interest Table found in Appendix 12~B at the back of this chapter. Reading across, or horizontally, find the 6% column. Reading down, or vertically, find Year 5. Trace 'across the Year 5 line item to the 6% col­ umn. :The factor is 1.338 .

. Step 2. Multiply the current savings account balance of$9,000 times the factor of 1.338 to find the future value of $12,042. In five years at compound interestof 6% the

. college fund will have abalance of$i2~042.

t'ralct1(:e Exercise 12-ll:Findin,g the Future Value (with a Compound Interest Table)

the college savings fund in the preceding example presently has a balance of and any interest earned will be left in the account. Assume the annual interest rate

7%.

Y",.UI-'I.l.LC how much money will be in the account at the end of six more years. (Use the :.enlpolun.d interest table in Appendix 12-B.)

. Exercise 12-2: Finding the Future Value a Compound Interest Table)

Whitten .is one of the physicians on staff at Metropolis Health System. His practice is . old. He has set up an office savings account to accumulate the funds to replace

~t'~...~.... in his practice. Today John is trying to figure what his equipment fund will to in four more years.

equipment fund savings account presently has a balance of$63,500 and any interest over the next four years will be left in the account.John assumes the annual interest

. be 5%. How much money will be in the account at the end offour more years?

484 EXAMPLES AND EXERCISES, SUPPLEMENTAL MATERIALS, AND SOLUTIONS

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.)

. Example 12C: Finding the Present Value (with a Present-Value Table)

Betty Dylan is taking an adult education night course in personal finance at the community college. The class is presently studying retirement planning. Each student is to estimate the amount offunds (in addition to pension plans and social security) they believe will be . needed at retirement. Then they are to make a retirement plan. . .

Betty has estimated she would need $100,000 fifteen years from now. In order to com'" plete her assignment she needs to know the present value of the $100,000. Betty furthet'i assumes an interest rate of 6%. .

Solution to Example

Step 1. Ref~r to the Present-Value Table found in Appendix 12-A at the back of Lnl~i',,;''''''> chapter~ Re<,lding across,.or horizontally, find the 6% column. Reading ....v ...... UJl< vertically, find Year 15. Trace across the Year 15 line item to the 6% column .. factor is 0.4173.

Step 2. Multiply $100,000 times the factor of0.4173 to find the present value of$41,

Practice Exercise 12-111: Finding the Present Value (with a Present-Value Table) .

Betty isn't finished with her assignment. Now she wants to find the present value accumulated fifteen years from now. She further assilmes a better interest rate of 7%;··

Required

Compute the present value of$150,000 accumulated fifteen years from now. r1l>,~U'W interest rate of 7%. (Use the Present-Value Table found in Appendix 12-A at of this chapter.) .

Assignment Exercise 12-3: Finding the PresentYalue (with a Present-Value

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

Required

Compute the present value of $250,000 accumulated fifteen years from now. interest rate of 5%. (Use the PresentNalue Table found in Appendix 12-A this chapter.)

Part 2-:John doesn't like the answer he gets. What if he can raise the 7%? How much difference would that make?

Chapter 12 485

Required

Compute the present value of $250,000 accumulated fifteen years from now assuming an interest rate of7%. Compare the difference between this amount and the present value at 5%.

Example 12D: Internal Rate of Return

Review the chapter text to follow the steps set out to compute the internal rate of return. '

, Practice Exercise 12-N: Internal Rate of Return

Metropolis Health System (MRS) is considering purchasing a tractor to mow the grounds. Itwould cost $16,950 and have a 10-yearusefullife. It will have zero salvage value at the end

, of10 years. The head of the MRS grounds crew estimates it would save $3,000 per year. He , figures this savings because just one of the present maintenance crew would be driving the tractor, replacing the labor of several men now using small household-type lawn mowers.

".', Compute the internal rate of return for this proposed acquisition.

, "Assignment Exercise 12-4: Computing an Internal Rate of Return

. Whitten has decided to purchase equipment that has a cost of$60,000 and will produce pretax net cash inflow of $30,000 per year over its estimated useful life of six years. The

t;;;.eqUllpnlerlt will have no salvage value and will be depreciated by the straight-line method. tax rate is 50%. Determine Dr. Whitten's approximate after-tax internal rate of return.

~ltmpJle 12E: Payback Period

the chapter text and follow the Doctor Green detailed example of payback period

MHS ChiefFina,ncial Officer is considering a request by the Emergency Room depart­ for purchase of new equipment. It will cost $500,000. Ther~ is no trade-in. Its useful

would be 10 years. This type of machine is new to the department but it is estimated ,it will result in $84,000 annual revenue and operating costs would be ol1e-quarter of •amount. The CFO wants to find the payback period for this piece of equipment.

§lgJlID4ent Exercise 12-5: Payback Period

MHS Chief Financial Officer is considering alternate proposals for the hospital department. The Director of Radiology has suggested purchasing one of two

ofequipment. Machine A costs $15,000 and Machine B costs $12,000. Both machines ~SUJna1ted to reduce radiology operating costs by $5,000 per year.