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CHAPTER 13, PROBLEM 13.4

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Question: BESTCARE HMO STATMENT OF OPERATIONS AND CHANGE IN ...

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BESTCARE HMO

STATMENT OF OPERATIONS AND CHANGE IN NET ASSETS

YEAR ENDED JUNE 30,2012

(IN THOUSANDS)

REVENUE

PREMIUMS EARNED $26,682

COINSURANCE 1,689

INTEREST AND OTHER INCOME 242

TOTAL REVENUE $28,613

EXPENSES:

SALARIES AND BENEFITS $15,154

MEDICAL SUPPLIES AND DRUGS 7,507

INSURANCE 3,963

PROVISION FOR BAD DEBTS 19

DEPRECIATION 367

INTEREST 385

TOTAL EXPENSES $27,395

NET INCOME $ 1,218

NET ASSETS, BEGINNING OF YEAR $ 900

NET ASSETS, END OF YEAR $ 2,118

BESTCARE HMO

BALANCE SHEET

JUNE 30, 2012

(IN THOUSANDS)

ASSETS

CASH AND CASH EQUIVALENTS $2,737

NET PREMIUMS RECEIVABLE 821

SUPPLIES 387

TOTAL CURRENT ASSETS $3,945

NET PROPERTY AND EQUIPMENT $5,924

TOTAL ASSETS $9,869

LIABILITES 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 PONT ANALYSIS ON BEST CARE. ASSUME THAT THE INDUSTRY AVERAGE RATIOS ARE AS FOLLOWS:

TOTAL MARGIN 3.8%

TOTAL ASSET TURNOVER 2.1

EQUITY MULTIPLIER 3.2

RETURN ON EQUITY 25.5%

B. CALCULATE AND INTERPRET THE FOLLOWING RATIOS FOR BESTCARE:

INDUSTRY AVERAGE

RETURN ON ASSETS 8.0%

CURRENT RATIO 1.3

DAYS CASH ON HAND 41 DAYS

AVERAGE COLLECTION PERIOD 7 DAYS

DEBT RATIO 69%

DEBT-TO-EQUITY RATIO 2.2

TIMES-INTEREST-EARNED RATIO 2.8

FIXED ASSET TURNOVER RATIO 5.2