Patients are expected to be treated and discharged throughout the year as follows:

Qtr 1 Jan ? Mar	Qtr 2 Apr ? Jun	Qtr 3 Jul ? Sept	Qtr 4 Oct ? Dec	Total
30%	25%	20%	25%	100%

Historically, Denison has found that private insurance pays in the quarter after patient discharge. Medicare/Medicaid pays half in the quarter after discharge and half in the following quarter. Twenty-five percent of all self-pay revenue is collected each quarter for three quarters following discharge. Twenty-five percent is never collected. Also, charity care is never collected.

For simplicity, assume that the current year?s patient flow, payment rates, staffing, and supplies purchases are the same as those projected in the budget for the coming year.

Supplies are expected to be purchased in the following months:

Qtr 1 Jan ? Mar	Qtr 2 Apr ? Jun	Qtr 3 Jul ? Sept	Qtr 4 Oct ? Dec	Total
$150,000	$124,000	$138,000	$128,000	$540,000

The supplies are paid for in the quarter after purchase.

Assume that all interest and dividends on endowment investments are received on the first day of the seventh month of the year. Assume that gift shop revenue is received equally each quarter (this may be an unrealistic assumption). Assume that salaries are paid equally each quarter.

Denison plans to start next year with $50,000 of cash and likes to end every quarter with at least $50,000 in their cash account. If necessary, it will borrow from the bank at a rate of 12% per year. Each quarter it must pay interest on any outstanding loan balance from the end of the previous quarter. When it has extra cash, it repays its outstanding bank loan. If it has extra cash beyond that, it simply leaves it in its non-interest-gearing cash account.

Denison prepares its operating budget (revenues and expenses) on an accrual basis. The hospital expects to buy the oncology equipment as described in Part 1 of the case.

Section E Requirements 1. Prepare a cash budget for the coming year. It will help if you prepare it in the following order?

a. Determine patient revenues by quarter by type of payer for the coming year. That is, determine private insurance revenues for each quarter, Medicare/Medicaid revenues by quarter, etc.

b. Determine patient revenues by quarter for the current year. Since many payers pay with a lag, some of the coming year?s cash receipts come from current year?s revenues.

c. Determine patient cash collections by quarter for the coming year, using revenue information from parts A and B, and payment lag information provided in the narrative of the problem.

d. Develop the cash budget by quarter. Start with the beginning cash, add cash receipts shown by source (e.g., patient revenue by payer, endowment). Calculate the available cash (it?ll be necessary to determine other cash receipts and payments by quarter. For example, determine how much is received from endowment each quarter and how much is paid for supplies.).

Deduct cash payments by line-item (e.g., salaries). Be sure to include interest payments. Assume Denison does not owe any money at the beginning of the year. Subtract cash payments (disbursements) from available amount to get subtotal.

Based on the subtotal calculate the amount to be borrowed or repaid. Combine the amount borrowed or repaid with the subtotal to get ending cash balance for quarter.

Show loan payable amount on cash budget below the ending cash balance. It?s easier to develop a correct cash budget if you work one quarter at a time.

2. Based on your cash budget, prepare a revised operating budget. That is, take the operating budget Part I, Section B, number 3, and incorporate the interest expense from the cash budget. Do not prepare a revised flexible budget.

3. As an advisor to the Denison Hospital, you are certain of one thing: the Board of Trustees of the hospital will not approve a budget that projects an operating deficit. If the operating budgets project a deficit, what do you suggest that Denison do about it?

1 Patient revenue Program Oncology Cardiac Rhinoplasty 2 List price per Special price Total number patient per patient of patients $ 50,000 $ 40,000 120 $ 40,000 $ 30,000 80 $ 25,000 $ 10,000 40 Total Medicare/ Medicaid $ 2,400,000 $ 1,440,000 $ 80,000 $ 3,920,000 $ $ $ $ Self-pay 600,000 320,000 600,000 1,520,000 Total $ 4,800,000 $ 2,400,000 $ 780,000 $ 7,980,000 Endowment revenue 6% US Government Bonds AT&T stock paying 8% dividend Growth stock - no dividends Endowment fund 3 Private insurance $ 1,800,000 $ 640,000 $ 100,000 $ 2,540,000 Interest Dividend Investment income income Total income $ 500,000 $ 30,000 $ 30,000 $ 250,000 $ 20,000 $ 20,000 $ 250,000 $ $ 1,000,000 $ 30,000 $ 20,000 $ 50,000 Revenue budget Patient revenue Endowment revenue Gift shop revenue Total revenue $ 7,980,000 $ 50,000 $ 120,000 $ 8,150,000 1 Expected bad debt expense Revenue from 'Self-pay' patients Percentage of bad debts Bad debt expense 2 Expense budget Salaries Supplies Rent for buildings and equipment Depreciation Bad debts Total expenses 3 $ 1,520,000 25% $ 380,000 $ 6,900,000 $ 540,000 $ 300,000 $ 100,000 $ 380,000 $ 8,220,000 Operating budget Revenues Less: Expenses Operating profit $ 8,150,000 $ 8,220,000 $ (70,000) 1 Expense budget by responsibility centre Salaries Supplies Total 2 $ $ $ Radiology 2,000,000 $ 360,000 $ 2,360,000 $ Nursing Administration 4,400,000 $ 500,000 $ 160,000 $ 20,000 $ 4,560,000 $ 520,000 $ Total 6,900,000 540,000 7,440,000 $ $ $ $ Oncology 4,050,000 $ 378,000 $ 100,000 4,528,000 $ Cardiac Rhinoplasty 2,235,000 $ 615,000 $ 125,000 $ 37,000 $ $ 2,360,000 $ 652,000 $ Total 6,900,000 540,000 100,000 7,540,000 Expense budget by program Salaries Supplies Depreciation Total Flexible budget Base Number of patients 10% higher 264 240 20% higher 288 10% lower 20% lower 216 192 Revenues Patient revenues Endowment revenue Gift shop revenue Total revenues $ $ $ $ 7,980,000 50,000 120,000 8,150,000 $ $ $ $ 8,778,000 50,000 132,000 8,960,000 $ $ $ $ 9,576,000 50,000 144,000 9,770,000 $ $ $ $ 7,182,000 50,000 108,000 7,340,000 $ $ $ $ 6,384,000 50,000 96,000 6,530,000 Less: Variable expenses Staff salaries Radiology Nursing Supplies Bad debt expenses Total variable expenses $ $ $ $ $ 1,900,000 4,200,000 540,000 380,000 7,020,000 $ $ $ $ $ 2,090,000 4,620,000 594,000 418,000 7,722,000 $ $ $ $ $ 2,280,000 5,040,000 648,000 456,000 8,424,000 $ $ $ $ $ 1,710,000 3,780,000 486,000 342,000 6,318,000 $ $ $ $ $ 1,520,000 3,360,000 432,000 304,000 5,616,000 Contribution $ 1,130,000 $ 1,238,000 $ 1,346,000 $ 1,022,000 $ 914,000 Less: Fixed expenses Managers salaries Staff salaries Rent for buildings and equipment Depreciation Total fixed expenses $ $ $ $ $ 500,000 300,000 300,000 100,000 1,200,000 500,000 300,000 300,000 100,000 1,200,000 $ $ $ $ $ 500,000 300,000 300,000 100,000 1,200,000 $ $ $ $ $ 500,000 300,000 300,000 100,000 1,200,000 Net profits $ 38,000 $ 146,000 $ $ $ $ $ $ (70,000) $ $ $ $ $ $ 500,000 300,000 300,000 100,000 1,200,000 (178,000) $ (286,000)