Complete Question #5: When calculating the debt ratio, assume debt is equal to the long term liabilities in Table 7.1. Also, when calculating the ratios in Question #5, just use the figures in the far left of Table 7.1, i.e., those figures listed under column "3/31/17."

5. Using the data in Table 7.1 and the definitions from Table 7.4, calculate the current ratio, quick ratio, and the debt ratio. a. What information do these ratios provide? b. If you were concerned about the result, what could be done to adjust these ratios? c. In what ways could these ratios be negatively impacted? d. When assessing the results of these ratios, what advice would you have for this organiza- tion if it was considering securing financing for a major capital expense? EXHIBIT 7.1 Payroll Variance This Month ($40,000) Budget Actual Variance Patient Days 450 500 50 patient days over what was budgeted Payroll Dollars $209,854 $249,854 ($40,000) over what was budgeted Cost/Patient Day $466.34 $499.71 ($33.37/patient day) more than budgeted Analysis of variance Volume: What portion of the variance can be explained by the volume increase of 50 patient days? 50 days x $466.34 per patient day (as budgeted) = $23,317 With the $40,000 variance in payroll, only $23,317 is attributed to volume increase. How will you explain the remaining $16,683? Acuity, transfers, overtime? TABLE 7.4 Additional Financial Ratios (continued) Return on Assets (%) How it is used Often referred to as the return on total assets, the higher the ratio the more favorable the organization is to investors as it shows more effective management of assets to produce greater amounts of net income. A positive ratio usually indicates an upward profit trend as well. How it is Net income calculated Return on assets = x 100 Total assets Days Cash on Hand What it is Days cash on hand measures the number of days that an organization could continue to pay its daily cash obligations without new cash resources. How it is used Higher values imply higher liquidity and are viewed favorably by creditors. However, organizations should avoid holding excess amounts of cash and short-term investments because they typically provide a lower return than long-term investments. How it is Cash + short-term investments calculated Days Cash on Hand = (Total expenses - Depreciation) / 365 Days in Accounts Receivable What it is Days in accounts receivable (AR) is a measure of the average time it takes an organization to collect what it is owed (receivables). How it is used Provides insight into how effective an organization is at managing its receivables. The shorter the average collection period, the lower the dollar amount of receivables, which leads to a lower carrying cost. How it is Net patient accounts receivable calculated Days in AR- (Net patient service revenue /365) Average Age of Plant What it is Average age of plant is the average age (in years) of an organization's fixed assets. How it is used Provides an indication of how distressed an organization's fixed assets are. A low average age usually indicates that an organization will not require large capital expenditures in the near future. Empirical studies show an association between financial status, bond ratings, and net operating revenue projections with an organization's average age of plant and equipment. How it is Accumulated depreciation calculated Average age of plant = Donrnointion ononnn Average Age of Plant What it is Average age of plant is the average age (in years) of an organization's fixed assets. How it is used Provides an indication of how distressed" an organization's fixed assets are. A low average age usually indicates that an organization will not require large capital expenditures in the near future. Empirical studies show an association between financial status, bond ratings, and net operating revenue projections with an organization's average age of plant and equipment. How it is Accumulated depreciation calculated Average age of plant Depreciation expense Average Daily Census What it is The average daily census is the average number of inpatients treated during a given period of time. How it is used Provides a measure of inpatient volume on the basis of number of patients. Because a higher number spreads fixed costs over a greater number of patients, a higher average daily census is considered beneficial as it tends to indicate higher profitability. (continued) 5. Using the data in Table 7.1 and the definitions from Table 7.4, calculate the current ratio, quick ratio, and the debt ratio. a. What information do these ratios provide? b. If you were concerned about the result, what could be done to adjust these ratios? c. In what ways could these ratios be negatively impacted? d. When assessing the results of these ratios, what advice would you have for this organiza- tion if it was considering securing financing for a major capital expense? EXHIBIT 7.1 Payroll Variance This Month ($40,000) Budget Actual Variance Patient Days 450 500 50 patient days over what was budgeted Payroll Dollars $209,854 $249,854 ($40,000) over what was budgeted Cost/Patient Day $466.34 $499.71 ($33.37/patient day) more than budgeted Analysis of variance Volume: What portion of the variance can be explained by the volume increase of 50 patient days? 50 days x $466.34 per patient day (as budgeted) = $23,317 With the $40,000 variance in payroll, only $23,317 is attributed to volume increase. How will you explain the remaining $16,683? Acuity, transfers, overtime? TABLE 7.4 Additional Financial Ratios (continued) Return on Assets (%) How it is used Often referred to as the return on total assets, the higher the ratio the more favorable the organization is to investors as it shows more effective management of assets to produce greater amounts of net income. A positive ratio usually indicates an upward profit trend as well. How it is Net income calculated Return on assets = x 100 Total assets Days Cash on Hand What it is Days cash on hand measures the number of days that an organization could continue to pay its daily cash obligations without new cash resources. How it is used Higher values imply higher liquidity and are viewed favorably by creditors. However, organizations should avoid holding excess amounts of cash and short-term investments because they typically provide a lower return than long-term investments. How it is Cash + short-term investments calculated Days Cash on Hand = (Total expenses - Depreciation) / 365 Days in Accounts Receivable What it is Days in accounts receivable (AR) is a measure of the average time it takes an organization to collect what it is owed (receivables). How it is used Provides insight into how effective an organization is at managing its receivables. The shorter the average collection period, the lower the dollar amount of receivables, which leads to a lower carrying cost. How it is Net patient accounts receivable calculated Days in AR- (Net patient service revenue /365) Average Age of Plant What it is Average age of plant is the average age (in years) of an organization's fixed assets. How it is used Provides an indication of how distressed an organization's fixed assets are. A low average age usually indicates that an organization will not require large capital expenditures in the near future. Empirical studies show an association between financial status, bond ratings, and net operating revenue projections with an organization's average age of plant and equipment. How it is Accumulated depreciation calculated Average age of plant = Donrnointion ononnn Average Age of Plant What it is Average age of plant is the average age (in years) of an organization's fixed assets. How it is used Provides an indication of how distressed" an organization's fixed assets are. A low average age usually indicates that an organization will not require large capital expenditures in the near future. Empirical studies show an association between financial status, bond ratings, and net operating revenue projections with an organization's average age of plant and equipment. How it is Accumulated depreciation calculated Average age of plant Depreciation expense Average Daily Census What it is The average daily census is the average number of inpatients treated during a given period of time. How it is used Provides a measure of inpatient volume on the basis of number of patients. Because a higher number spreads fixed costs over a greater number of patients, a higher average daily census is considered beneficial as it tends to indicate higher profitability. (continued)