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Reformulating Allowance for Doubtful Accounts ADJUSTMENTS 5.2 munity Health Systens operates hospitals and other medical facilities across the U.S. The company reported the following in its 2016 financial statements Substantially all of our accounts receivable are related to providing healthcare services to patients at our hospitals and affiliated businesses. Our primary collection risks relate to uninsured patients and outstanding patient balances for which the primary insurance payor has paid some but not all of the outstanding balance. We estimate the allowance for doubtful accounts by reserving a percentage of all self-pay accounts receivable without regard to aging category. For all other non-self-pay payor categories, we reserve an estimated amount based on historical collection rates for the portion of all accounts aging over 365 days from the date of discharge. Collections are impacted by the economic ability of patients to pay and the effectiveness of our collection efforts. Year Ended December 31 ($ millions) 2016 2015 2014 Operating revenues (net of contractual allowances and discounts). Provision for bad debts Patient accounts receivable, net of allowance for doubtful accounts $21,561 2,837 3,127 2,922 $21,275 $22,564 of $3,773, $4,110, and $3,504 at December 31, 2016, 2015, and 2014 respectively 3,176 3,611 3,409 a. Explain in general terms how the company estimates its allowance for doubtful accounts. b. Analyze the bad debt expense for all three years by computing bad debts as a percent of operating c. Analyze the allowance account for each of the three years by computing the ratio of the allowance to d. Assume that we anticipate that charges to the Affordable Care Act will create more self-pay patients, revenues. What trend do we observe? gross accounts receivable. What trend do we observe? rendering the allowance too low. Suggest adjustments to the 2016 balance sheet and income statement accounts under the assumption that the percent of allowance to gross accounts receivable is 60%. As- sume a tax rate of 35%. Balance sheet adjustments for: i. Allowance for doubtful accounts ii. Accounts receivable, net iii. Deferred tax liabilities iv. Retained earnings Income statement adjustments for: v. Bad debts expense vi. Income tax expense vii. Net income Reformulating Allowance for Doubtful Accounts ADJUSTMENTS 5.2 munity Health Systens operates hospitals and other medical facilities across the U.S. The company reported the following in its 2016 financial statements Substantially all of our accounts receivable are related to providing healthcare services to patients at our hospitals and affiliated businesses. Our primary collection risks relate to uninsured patients and outstanding patient balances for which the primary insurance payor has paid some but not all of the outstanding balance. We estimate the allowance for doubtful accounts by reserving a percentage of all self-pay accounts receivable without regard to aging category. For all other non-self-pay payor categories, we reserve an estimated amount based on historical collection rates for the portion of all accounts aging over 365 days from the date of discharge. Collections are impacted by the economic ability of patients to pay and the effectiveness of our collection efforts. Year Ended December 31 ($ millions) 2016 2015 2014 Operating revenues (net of contractual allowances and discounts). Provision for bad debts Patient accounts receivable, net of allowance for doubtful accounts $21,561 2,837 3,127 2,922 $21,275 $22,564 of $3,773, $4,110, and $3,504 at December 31, 2016, 2015, and 2014 respectively 3,176 3,611 3,409 a. Explain in general terms how the company estimates its allowance for doubtful accounts. b. Analyze the bad debt expense for all three years by computing bad debts as a percent of operating c. Analyze the allowance account for each of the three years by computing the ratio of the allowance to d. Assume that we anticipate that charges to the Affordable Care Act will create more self-pay patients, revenues. What trend do we observe? gross accounts receivable. What trend do we observe? rendering the allowance too low. Suggest adjustments to the 2016 balance sheet and income statement accounts under the assumption that the percent of allowance to gross accounts receivable is 60%. As- sume a tax rate of 35%. Balance sheet adjustments for: i. Allowance for doubtful accounts ii. Accounts receivable, net iii. Deferred tax liabilities iv. Retained earnings Income statement adjustments for: v. Bad debts expense vi. Income tax expense vii. Net income
