Answer problems 3.2 3.3 3.5 3.6 Problems 3.1 Entries for the Warren Cli

Answer problems 3.2 3.3 3.5 3.6 Problems 3.1 Entries for the Warren Cli

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Answer problems 3.2 3.3 3.5 3.6


3.1 Entries for the Warren Clinic 2007 income statement are listed below in

alphabetical order. Reorder the data in proper format.

Bad debt expense $ 40000

Depreciation expense 90000

General/administrative expenses 70000

Interest expense 20000

Interest income 40000

Net income 30000

Other revenue 10000

Patient service revenue 440000

Purchased clinic services 90000

Salaries and bene%uFB01ts 150000

Total revenues 490000

Total expenses 460000

3.2 Consider the following income statement:

BestCare HMO

Statement of Operations

Year Ended June 30 2007

(in thousands)


Premiums earned $26682

Coinsurance 1689

Interest and other income 242

Total revenues $28613


Salaries and bene%uFB01ts $15154

Medical supplies and drugs 7507

Insurance 3963

Provision for bad debts 19

Depreciation 367

Interest 385

Total expenses $27395

Net income $ 1218

a. How does this income statement differ from the one presented in

Table 3.1?

b. Did BestCare spend $367000 on new %uFB01xed assets during %uFB01scal year

2007? If not what is the economic rationale behind its reported

c. Explain the provision for bad debts entry.

d. What is BestCare%u2019s total pro%uFB01t margin? How can it be interpreted?

3.3 Consider this income statement:

Green Valley Nursing Home Inc.

Statement of Income

Year Ended December 31 2007


Net patient service revenue $3163258

Other revenue 106146

Total revenues $3269404


Salaries and bene%uFB01ts $1515438

Medical supplies and drugs 966781

Insurance and other 296357

Provision for bad debts 110000

Depreciation 85000

Interest 206780

Total expenses $3180356

Operating income $ 89048

Provision for income taxes 31167

Net income $ 57881

a. How does this income statement differ from the ones presented in

Table 3.1 and Problem 3.2?

b. Why does Green Valley show a provision for income taxes while the

other two income statements did not?

c. What is Green Valley%u2019s total pro%uFB01t margin? How does this value

compare with the values for Sunnyvale Clinic and BestCare?

d. The before-tax pro%uFB01t margin for Green Valley is operating income

divided by total revenues. Calculate Green Valley%u2019s before-tax pro%uFB01t

margin. Why may this be a better measure of expense control when

comparing an investor-owned business with a not-for-pro%uFB01t business?

3.5 Brandywine Homecare a not-for-pro%uFB01t business had revenues of $12

million in 2007. Expenses other than depreciation totaled 75 percent of

revenues and depreciation expense was $1.5 million. All revenues were

collected in cash during the year and all expenses other than depreciation

were paid in cash.

a. Construct Brandywine%u2019s 2007 income statement.

b. What were Brandywine%u2019s net income total pro%uFB01t margin and cash


c. Now suppose the company changed its depreciation calculation

procedures (still within GAAP) such that its depreciation expense

doubled. How would this change affect Brandywine%u2019s net income

total pro%uFB01t margin and cash %uFB02ow?

d. Suppose the change had halved rather than doubled the %uFB01rm%u2019s

depreciation expense. Now what would be the impact on net income

total pro%uFB01t margin and cash %uFB02ow?

3.6 Assume that Mainline Homecare a for-pro%uFB01t corporation had exactly

the same situation as reported in Problem 3.5. However Mainline must

pay taxes at a rate of 40 percent of pretax income. Assuming that the

same revenues and expenses reported for %uFB01nancial accounting purposes

would be reported for tax purposes redo Problem 3.5 for Mainline.

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