Ratio analysis. The statement of operations and balance sheet for Longwood Community Hospital for the years ended 20X0 and 20X1 are shown in Exhibits 4.19a and 4.19b. Compute the following ratios for both years: current, acid test, days in accounts receivable, average payment period, long-term debt to net assets, net assets to total assets, total asset turnover, fixed asset turnover, operating revenue per adjusted discharge, operating expense per adjusted discharge, salary and benefit expense as a percentage of total operating expense, return on total assets, and operating margin. After calculating the ratios, comment on Longwood's liquidity; efficient use of assets or activity ratios; revenue, expense, and profitability; and capital structure relative to its industry benchmarks for its respective bed size (listed in Exhibit 4.16a). Cite at least two meaningful ratios per category. Assume for this analysis that Longwood is a 350-bed facility and its adjusted discharges were 5,500 for 20X0 and 5,400 for 20X1.

EXHIBIT 4.19a STATEMENT OF OPERATIONS FOR LONGWOOD COMMUNITY HOSPITAL

Longwood Community Hospital Statement of Operations for the Years EndedDecember 31, 20X1 and 20X0 (in thousands)

20X1 20X0

Revenues Net patient service revenue $54,000 $53,000 Other revenue 1,000 500 Total operating revenues 55,000 53,500

Expenses Salaries and benefits 23,000 22,000 Supplies and other expenses 20,000 23,000 Depreciation 10,000 9,000 Total operating expenses 53,000 54,000

Operating income 2,000 (500) Excess of revenues over expenses 2,000 (500)

Increase (decrease) in net assets $2,000 ($500)

EXHIBIT 4.19b BALANCE SHEET FOR LONGWOOD COMMUNITY HOSPITAL

Longwood Community Hospital Balance Sheet December 31, 20X1 and 20X0 (in thousands)

20X1 20X0

Current assets Cash and cash equivalents $6,000 $4,000 Net patient receivables 10,000 8,500 Prepaid expenses 1,400 1,300 Total current assets 17,400 13,800

Noncurrent assets Plant, property, and equipment Gross plant, property, and equipment 27,000 24,000(less accumulated depreciation) (1,500) (1,300) Net plant, property, and equipment 25,500 22,700

Construction in progress 1,000 4,000

Total assets $43,900 $40,500

Current liabilities Accounts payable $500 $750 Salaries payable 7,800 9,000 Total current liabilities 8,300 9,750

Long-term liabilities Bonds payable 9,000 8,000 Total long-term liabilities 9,000 8,000

Net assets 26,600 22,750

Total liabilities and net assets $43,900 $40,500

EXHIBIT 4.16a FINANCIAL RATIOS FOR ALL U.S. HOSPITALS BY BED SIZE

Ratio

Optum & CMS Median Ratioa Hospital Industry1-99 Beds100-199 Beds

200-299 Beds

300-399 Beds400+ Beds

Desired Positionb Liquidity ratiosCurrent ratio 2.11 2.18 2.04 1.88 1.71 1.84Above Quick ratio 1.52 1.65 1.39 1.27 1.42 1.50Above Acid test ratio 0.30 0.35 0.18 0.20 0.20 0.38Above Days in accounts receivable 49 47 45 44 48 44Below Days cash on hand 86 85 81 102 76 119Above Average payment period, days 50 45 51 56 53 52Below Revenue, expense, and profitability ratiosOperating revenue per adjusted discharge $7,448 $7,086 $6,407 $6,766$7,121 $7,517Above Operating expense per adjusted discharge $7,197 $6,494 $6,112 $6,260$6,819 $7,399Below Salary and benefit expense as a percentage of operating expense 40% 40% 38% 38% 38% 38%Below Operating margin 0.03 0.02 0.03 0.04 0.04 0.04Above Nonoperating revenue 0.04 0.05 0.03 0.05 0.07 0.17Varies Return on total assets 0.04 0.04 0.04 0.04 0.05 0.05Above Return on net assets 0.08 0.08 0.08 0.09 0.10 0.09Above Activity ratiosTotal asset turnover ratio 1.07 1.19 1.03 0.99 1.03 1.06Above Net fixed assets turnover ratio 2.12 2.17 2.03 2.11 2.04 2.21Above Age of plant ratio 10.31 10.41 10.12 11.97 10.93 11.19Below Capital structure ratiosLong-term debt to net assets ratio 0.21 0.18 0.31 0.42 0.38 0.59Below Net assets to total assets ratio 0.54 0.58 0.51 0.47 0.52 0.48Above Times interest earned ratio 3.78 3.47 3.43 3.64 4.43 5.13Above Debt service coverage ratio 3.18 3.51 3.63 3.50 6.36 4.24Above

aAll ratio values, except for quick, acid test, and salary and benefit expense as a percentage of operating expense ratios, were obtained from Optum Insight, 2013 Almanac of Hospital Financial and Operating Indicators, 2011/2010 median value data. The quick, acid test, and salary and benefit expense as a percentage of operating expense ratios were obtained from 2010 CMS cost report data. bThese are true up to a certain point. For example, in general the higher the better for the current ratio, but after a certain point, the organization might be better off investing some of the excess cash.

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