Chapter 17 A. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve (i.e. increase) this ratio? · Use cash to pay off current liabilities · Collect some of the current accounts receivable · Use cash to pay off some long term debt · Purchase additional inventory on credit. (i.e. accounts payable) · Sell some of the existing inventory at cost b. Assume that the company has a current ratio of 1.2. Now which of the above actions would improve this ratio? Consider the following financial statements for Best Care HMO, a not-for profit managed care plan Best Care HMO Statement of Operations and Changes in Net Assets Year Ended June 30, 2011 (In thousands) Revenue: Premiums earned $26,682 Co-insurance 1,689 Interest and other income 242 Total revenue $28,613 Expense: Salaries and benefits $15,154 Medical supplies and drugs 7,507 Insurance 3,963 Provision for bad debt 19 Depreciation 367 Interest 385 Total Expenses $27,395 Net income $1,218 Net asset, beginning of year $900 Net assets, end of year $2,118 Best Care HMO Balance Sheet June 30, 2011 (In thousands) Assets Cash and cash equivalents $2,737 Net premiums receivable 821 Supplies 387 Total current assets $3,945 Net property and equipment’s $5,924 Total assets $9,869 Liabilities and Net Assets Accounts payable- medical services $2,145 Accrued expenses 929 Notes payable 141 Current portion of long-term debt 241 Total current liabilities $3,456 Long term debt $4,295 Total liabilities $7,751 Net assets (equity) $2,118 Total liabilities and net assets $9,869 a. Perform a Du Point analysis on Best Care. Assume that the industry average ratios are as follows: Total margin 3.8% Total assets turnover 2.1 Equity multiplier 3.2 Return on equity (ROE) 25.5% b. Calculate and interpret the following ratios for Best Care: Industry Average Return on assets (ROE) 8.0% Current ratio 1.3 Days cash on hand 41 days Average collection period 7days Debt ratio 69% Debt to equity ratio 2.2 Time interest earned (TIE) ratio 2.8 Fixed asset turnover ratio 5.2 Consider the following financial statements for Green Valley Nursing home, Inc, a for profit, long-term care facility. Green Valley Nursing Home, Inc. Statement of Income and Retained Earnings 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 Operation income $89,048 Provision for income taxes 31,167 Net income $57,881 Retained earnings, beginning of year $199,961 Retained earnings, end of year $257,842 Green Valley Nursing Home, Inc. Balance Shee.

1. Chapter 17
A. Modern Medical Devices has a current ratio of 0.5. Which of
the following actions would improve (i.e. increase) this ratio?
·
Use cash to pay off current liabilities
·
Collect some of the current accounts receivable
·
Use cash to pay off some long term debt
·
Purchase additional inventory on credit. (i.e. accounts payable)
·
Sell some of the existing inventory at cost
b. Assume that the company has a current ratio of 1.2. Now
which of the above actions would improve this ratio?
Consider the following financial statements for Best Care HMO,
a not-for profit managed care plan

2. Best Care HMO
Statement of Operations and Changes in Net Assets
Year Ended June 30, 2011
(In thousands)
Revenue:
Premiums earned
$26,682
Co-insurance
1,689
Interest and other income
242
Total revenue
$28,613
Expense:

3. Salaries and benefits
$15,154
Medical supplies and drugs
7,507
Insurance
3,963
Provision for bad debt
19
Depreciation
367
Interest
385
Total Expenses
$27,395

4. Net income
$1,218
Net asset, beginning of year
$900
Net assets, end of year
$2,118
Best Care HMO
Balance Sheet
June 30, 2011
(In thousands)
Assets
Cash and cash equivalents
$2,737

5. Net premiums receivable
821
Supplies
387
Total current assets
$3,945
Net property and equipment’s
$5,924
Total assets
$9,869
Liabilities and Net Assets
Accounts payable- medical services
$2,145
Accrued expenses
929
Notes payable

6. 141
Current portion of long-term debt
241
Total current liabilities
$3,456
Long term debt
$4,295
Total liabilities
$7,751
Net assets
(equity)
$2,118
Total liabilities and net assets
$9,869
a.
Perform a Du Point analysis on Best Care. Assume that the

7. industry average ratios are as follows:
Total margin 3.8%
Total assets turnover
2.1
Equity multiplier 3.2
Return on equity (ROE) 25.5%
b.
Calculate and interpret the following ratios for Best Care:
Industry Average
Return on assets (ROE)
8.0%
Current ratio
1.3
Days cash on hand
41 days
Average collection period

8. 7days
Debt ratio
69%
Debt to equity ratio
2.2
Time interest earned (TIE) ratio
2.8
Fixed asset turnover ratio
5.2
Consider the following financial statements for Green Valley
Nursing home, Inc, a for profit, long-term care facility.
Green Valley Nursing Home, Inc.
Statement of Income and Retained Earnings
Year Ended December 31,2011
Revenue:
Net patient service revenue
$3,163,258

9. 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

10. Interest
206,780
Total expenses
$3,180,356
Operation income
$89,048
Provision for income taxes
31,167
Net income
$57,881
Retained earnings, beginning of year
$199,961
Retained earnings, end of year
$257,842

11. Green Valley Nursing Home, Inc.
Balance Sheet
December 31, 2011
Assets
Current Assets:
Cash
$105,737
Market securities
200,000
Net patient account receivable
215,600
Supplies
87,655
Total current assets
$608,992

12. Property and equipment
$2,250,000
Less accumulated depreciation
356,000
Net property and equipment
$1,894,000
Total assets
$2,502,992
Liabilities and Shareholders’ Equity
Current Liabilities:
Account payable:
$72,250
Accrued expenses
192,900
Notes payable

13. 100,000
Current portion of long term debt
80,000
Total current liabilities
$445,150
Long term debt
$1,700,000
Shareholders’ Equity:
Common stock, $10 par value
$100,000
Retained earnings
257,842
Total shareholders’ equity
357,842
Total liabilities and shareholders’ equity

14. $2,502,992
a.
Perform a Du point analysis on Green Valley. Assume that the
industry average ratios are follows
Total margin
3.5%
Total assets turnover
1.5
Equity multiplier
2.5
Return on Equity (ROE)
13.1%
b.
Calculate and interpret
the following ratios:

15. Industry Average
Return on assets (ROE)
5.2%
Current ratio
2.0
Days cash on hand
22days
Average collection period
19 days
Debt ratio
71%
Debt – to- equity ratio
2.5
Time interest earned (TIE) ratio
2.6
Fixed assets turnover ratio
1.4

16. c.
Assume that there are 10,000 shares of Green Valleys stock
outstanding and that some recently sold for $45 per share.
·
What is the firm’s price/earnings ratio?
·
What is its market/book ratio?
Examine the industry average ratios given in problem 17.4 and
17.5. explain why the ratios are different between the managed
care and nursing home industries.