Use Additional Information from 10-K to Explain Linkages Among Financial Statements Community Health Systems operates general acute care hospitals in communities across the United States. The company reports the following information in Schedule II of its 2015 10-K.

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

$ millions Balance at Beginning of Year Acquisitions and Dispositions Bad Debt Expense Write-Offs Balance at End of Year December 31, 2015, allowance for doubtful accounts . . . $3,504 $ (17) $3,168 $(2,545) $4,110 December 31, 2014, allowance for doubtful accounts . . . 2,438 960 3,022 (2,916) 3,504 December 31, 2013, allowance for doubtful accounts . . . 2,191 — 2,034 (1,787) 2,438 Accounts receivable represents the amount customers owe Community Health Systems for services rendered.

The balance in the allowance for doubtful accounts is the company’s best estimate of the amount that customers will not repay.

Community Health Systems’ balance sheet and income statements reported the following information:

$ millions 2015 2014 2013 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,564 $21,561 $14,853 Operating income before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,337 1,339 917 Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,861 27,421 17,117 Required

a. Compute the common-size allowance for doubtful accounts for each year. Compare 2015 to the prior years; what do we observe? What is one conclusion analysts might draw from this analysis?

b. On average, the firms in the S&P 500 report common-size allowance for doubtful accounts between 3% and 5%. Why might Community Health Systems’ ratio be so much higher? How could an analyst verify this inference?

c. Compute the common-size bad debt expense for each year. Interpret the ratio for 2015. What trend do we observe?

d. If the company had recorded bad debt expense of $2,668 in 2015 (which is $500 less of bad debt expense), what would the company have reported for operating income before tax? How would retained earnings have been affected? How is cash from operations affected? For this question, ignore tax effects.