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Ratio Analysis Part One Complete problem 13 on ratio analysis on page 188 of your Financial Management of Health Care Organizations text by Zelman, McCue, Glick, and Thomas. Using an Excel spreadsheet, calculate all of the ratios listed in the problem (13 ratios for each year or 26 total for 2 years). 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) Part Two Use your answers from part one to complete the following: • • • • Conduct a strategic assessment based on the health care data presented for Longwood Community Hospital. Analyze the 26 financial ratios calculated for the hospital to state its financial position. Develop a perspective on long-term financial trends for the hospital. Assess the potential financial impact on the hospital's organizational strategy and potential implications on patient care based on the benchmark data provided. Write a 3–5-page paper based on the above. Submission Requirements Your paper should meet the following requirements: • • • o o • Written communication: Your document should clearly identify where each grading criteria or part of the assignment is addressed by using APA-formatted headings and subheadings. Your writing needs to communicate professionally, with correct English usage. Your points need to be logical, substantive, and relevant based on the evidence presented. In addition, your communication should be free of errors that detract from the overall message. APA formatting: Resources and citations are formatted according to APA sixth edition style and formatting. Documents to be submitted: You need to submit the following: Spreadsheets. Word document: 3–5 pages with APA-formatted headings and subheadings. Font and font size: Arial, 10 point. Submit the documents in the assignment area by midnight CST Sunday. Be sure to review the scoring guide to understand how the assignment will be graded. Resources • Ratio Analysis Scoring Guide.APA Style and Format.APA Paper Template Exhibit 4-16a Financial ratios for all U.S. hospitals by bed size Ratio Liquidity ratios Current ratio Quick ratio Acid test ratio Days in accounts receivable Days cash on hand Average payment period, days Revenue, expense and profitability ratios Operating revenue per adjusted discharge Operating expense per adjusted discharge Salary and benefit expense as a percentage of operating expense Operating margin Non-operating revenue Return on total assets Return on net assets Optum & CMS Median Ratio a Hospital Industry 1-99 Beds 100-199 Beds 200-299 Beds 2.11 1.52 0.30 49 86 50 2.18 1.65 0.35 47 85 45 2.04 1.39 0.18 45 81 51 1.88 1.27 0.20 44 102 56 $7,448 $7,197 $7,086 $6,494 $6,407 $6,112 $6,766 $6,260 40% 40% 38% 38% 0.03 0.04 0.04 0.08 0.02 0.05 0.04 0.08 0.03 0.03 0.04 0.08 0.04 0.05 0.04 0.09 1.07 2.12 10.31 1.19 2.17 10.41 1.03 2.03 10.12 0.99 2.11 11.97 0.21 0.54 3.78 0.18 0.58 3.47 0.31 0.51 3.43 0.42 0.47 3.64 3.18 3.51 3.63 3.50 Activity ratios Total asset turnover ratio Net fixed assets turnover ratio Age of plant ratio Capital structure ratios Long-term debt to net assets ratio Net assets to total assets ratio Times interest earned ratio Debt service coverage ratio a All ratio values, except for quick, acid test, and salary & benefit expense as a percentage of operating expense ratios were Optum Insight "2013 Almanac of Hospital Financial and Operating Indicators" 2011/2010 median value data. The quick, acid test, and salary & benefit expense as a percentage of operating expense ratios were obtained from 2010 C b These are true to a certain point. For example, in general the higher the better for the current ratio, but after a certain po the organization might be better off investing some of the excess cash. 300-399 Beds 400+ Beds Desired Positionb 1.71 1.42 0.20 48 76 53 1.84 1.50 0.38 44 119 52 Above Above Above Below Above Below $7,121 $6,819 $7,517 $7,399 38% 38% Above Below Below 0.04 0.07 0.05 0.10 0.04 0.17 0.05 0.09 Above Varies Above Above 1.03 2.04 10.93 1.06 2.21 11.19 Above Above Below 0.38 0.52 4.43 0.59 0.48 5.13 6.36 4.24 Below Above Above Above ge of operating expense ratios were obtained from: 010 median value data. se ratios were obtained from 2010 CMS cost report data. current ratio, but after a certain point, 5.90% 8.00% 9.40% 6.30% 8.60% Exhibit 4-16b Formulas for key financial ratios Liquidity ratios Current ratio Quick ratio Acid test ratio Days in accounts receivable Days cash on hand Average payment period, days Revenue, expense, and profitability ratios Operating revenue per adjusted discharge a Operating expense per adjusted discharge a Salary expense as percentage of operating expense Operating margin Non-operating revenue ratio Return on total assets b Return on net assets c Activity Ratios Total asset turnover ratio Net fixed assets turnover ratio Age of plant ratio Capital Structure Ratios Long-term debt to net assets ratio d Net assets to total assets ratio e Times interest earned ratio f Debt service coverage ratio g Adjusted discharges = (total gross patient revenue / total gross inpatient revenues) x total discharges In for-profit health care organizations, caluclated as: net income / total assets c Called the return on equity in for-profit health care organizations, and calculated as: net income / owners' equity d Called long-term debt to equity in for-profit health care organizations, and calculated as: long-term debt / owners' equity e Called equity to total assets in for-profit health care organizations, and calculated as: owners' equity / total assets f In for-profit health care organizations, calculated as: (net income + interest expense) / interest expense g In for-profit health care organizations, calculated as: a b (net income + interest expense + depreciation and amortization expenses) / (interst expense + principal payments) Formula Current Assets / Current Liabilities (Cash + Marketable Securities + Net Receivables) / Current Liabilities (Cash + Marketable Securities) / Current Liabilities Net Patient Accounts Receivables / (Net Patient Revenues / 365) (Cash + Marketable Securities + Long-term investments) / ((Operating Expenses - Depreciation & Amortization Expenses) / 365) Current Liabilities / ((Operating Expenses - Depreciation & Amortization Expenses) / 365) Formula Total Operating Revenue / Adjusted Discharges Total Operating Expense / Adjusted Discharges Total Salary Expense / Total Operating Expenses Operating Income / Total Operating Revenues Non-Operating Revenues and Other Income / Total Operating Revenues Excess of Revenues over Expenses / Total Assets Excess of Revenues over Expenses / Net Assets Formula Total Operating Revenues / Total Assets Total Operating Revenues / Net Plant and Equipment Accumulated Depreciation / Depreciation Expense Formula Long-Term Debt / Net Assets Net Assets / Total Assets (Excess of Revenues over Expenses + Interest Expense) / Interest Expense (Excess of Revenues over Expenses + Interest Expense + Depreciation & Amortization Expenses) / (Interest Expense + Principal Payments) ss patient revenue / total gross inpatient revenues) x total discharges ations, caluclated as: net income / total assets ofit health care organizations, and calculated as: net income / owners' equity -profit health care organizations, and calculated as: long-term debt / owners' equity ofit health care organizations, and calculated as: owners' equity / total assets tions, calculated as: (net income + interest expense) / interest expense ations, calculated as: eciation and amortization expenses) / (interst expense + principal payments) Exhibit 4-19a Statement of Operations for Longwood Community Hospital Longwood Community Hospital Statement of Operations (in thousands) for the Years Ended December 31, 20X1 and 20X0 20X1 20X0 Revenues Net patient service $54,000 revenue Other revenue $53,000 1,000 500 Total operating revenues 55,000 53,500 Expenses Salaries and benefits 23,000 22,000 20,000 Supplies & other expenses 23,000 Depreciation 10,000 9,000 Total operating expenses 53,000 54,000 Operating income 2,000 (500) Excess of revenues over 2,000 expenses (500) Increase (decrease)$2,000 in net assets ($500) Exhibit 4-19b Balance Sheet for Lon Exhibit 4-19b Balance Sheet for Longwood Community Hospital Longwood Community Hospital Balance Sheet (in thousands) for the Years Ended December 31, 20X1 and 20X0 20X1 20X0 Current assets Cash and cash equivalents $6,000 Net patient receivables 10,000 $4,000 8,500 Prepaid expenses 1,400 1,300 Total current assets 17,400 13,800 Non-current assets Plant, property, and equipment Gross plant, property, 27,000 and equipment (less accumulated (1,500) depreciation) Net plant, property, and 25,500 equipment Construction in progress 1,000 Total assets $43,900 24,000 (1,300) 22,700 4,000 $40,500 Current liabilities Accounts payable $500 $750 Salaries payable 7,800 9,000 Total current liabilities8,300 9,750 Long-term liabilities Bonds payable 9,000 8,000 Total long-term liabilities 9,000 8,000 Net assets 26,600 Total liabilities and $43,900 net assets 22,750 $40,500 Problem 13 Ratio Analysis Ratio analysis which examines the ratio of one line item to another. Ratio analysis is the preferred approach for detailed analysis of financial statements of Ratio Liquidity ratios Current ratio Acid test ratio Days in accounts receivable Days cash on hand Average payment period, days Revenue, expense, and profitability ratios Operating revenue per adjusted discharge a Operating expense per adjusted discharge a Salary expense as percentage of operating expense Operating margin Return on total assets b Activity Ratios Total asset turnover ratio Net fixed assets turnover ratio Capital Structure Ratios Long-term debt to net assets ratio d Net assets to total assets ratio e Adjusted discharges = (total gross patient revenue / total gross inpatient revenues) x total discharges In for-profit health care organizations, caluclated as: net income / total assets c Called the return on equity in for-profit health care organizations, and calculated as: net income / owners' equity d Called long-term debt to equity in for-profit health care organizations, and calculated as: long-term debt / owners' equity e Called equity to total assets in for-profit health care organizations, and calculated as: owners' equity / total assets f In for-profit health care organizations, calculated as: (net income + interest expense) / interest expense g In for-profit health care organizations, calculated as: a b (net income + interest expense + depreciation and amortization expenses) / (interst expense + principal payments) Some Additional Hints: Liquidity: Hint: Longwood's liquidity picture is mixed. Profitability: Hint: Longwood's profitability picture is improving. Activity: Hint: Both 20X1 total asset and fixed asset turnover ratios have declined but remain in a favorable position above industry Capital Structure: Hint: Longwood has decreased the use of debt financing from 20X0 to 20X1. Overall Summary Hint: Longwood has increased its overall operating condition by increasing liquidity, improving profits, and raising its equity position. one line item to another. Ratio analysis is the preferred approach for detailed analysis of financial statements of healthcare organizations Exhibit 4-16b Formulas for key financial ratios Formula Current Assets / Current Liabilities (Cash + Marketable Securities) / Current Liabilities Net Patient Accounts Receivables / (Net Patient Revenues / 365) (Cash + Marketable Securities + Long-term investments) / ((Operating Expenses - Depreciation & Amortization Expenses) / 365) Current Liabilities / ((Operating Expenses - Depreciation & Amortization Expenses) / 365) Formula Total Operating Revenue / Adjusted Discharges Total Operating Expense / Adjusted Discharges Total Salary Expense / Total Operating Expenses Operating Income / Total Operating Revenues Excess of Revenues over Expenses / Total Assets A B 12/31/20XO 12/31/20X1 [D/E] [F/G] 1.42 2.1 0.41 0.72 $ 9,727.00 $ 9,818.18 Formula Total Operating Revenues / Total Assets Total Operating Revenues / Net Plant and Equipment Formula Long-Term Debt / Net Assets Net Assets / Total Assets ss patient revenue / total gross inpatient revenues) x total discharges ations, caluclated as: net income / total assets ofit health care organizations, and calculated as: net income / owners' equity -profit health care organizations, and calculated as: long-term debt / owners' equity ofit health care organizations, and calculated as: owners' equity / total assets tions, calculated as: (net income + interest expense) / interest expense ations, calculated as: eciation and amortization expenses) / (interst expense + principal payments) ture is improving. xed asset turnover ratios have declined but remain in a favorable position above industry benchmarks. e use of debt financing from 20X0 to 20X1. operating condition by increasing liquidity, improving profits, and raising its equity position. care organizations C Benchmark [Exhibit 4-16a for 350 Beds] D 20X0 Numerator E 20X0 Denominator D 20X1 Numerator E 20X1 Denominator 1.71 $13,800 $9,750 $17,400 $8,300 0.2 $4,000 $9,750 $6,000 $8,300 $ $ 7,121.00 6,819.00 $ 53,500.00 $ 54,000.00 $ $ 5.50 5.50 5.40 5.40 If for any reason these links do not open up correctly, please use the attachments below. They are the same, just posted as an attachment. [If the following links do not work, please try the attachments, the transcription is provided below] Unit 3 Problem 13 Ratio Analysis Media.m4aUnit 3 Problem 13.xlsx All students, Please keep things nice and simple for each task. I am not expecting perfection, just give the task a shot. Most importantly, if you get confused on any aspect of the assignment, you may provide narration on the concepts behind the assignment. This way I may provide you with credit for completing the task. I will provide the following information and example: Unfortunately, some numbers are just not provided for you in the balance sheet. Therefore, try to follow my formulas and my embedded comments I provided in the Excel sheet, under the, Updates and Handout section. Keep in mind the Excel sheet has several tabs on the bottom. That should help. Also, For example, if we are looking at the Acid Test Ratio: Acid Test Ratio is a quick ratio that demonstrates whether an organization has current (short-term) assets to cover current (immediate) liabilities. When we discuss long-term investments, it means investments that exceed one year. For example, long-term securities (maturities that exceed one year). When we are considering market securities, these are short-term investments, usually liquid and lower risk such as bonds, T-bills etc. However, that information will not help, as you are not provided marketable securities on the balance sheet only cash and cash equivalent. Take a moment and go to the second tab (second Excel sheet, there are three tabs). You will notice that the Acid Test Ratio for 20X0 is the Cash + Marketable Securities ($4,000 listed in column G 10 in Tab 3, which comes from tab 2, where you are provided information about cash and cash equivalents. There are no numbers provided for marketable securities, instead cash and cash equivalents; this is the numerator divided by Current Liabilities ($9,750 column H 10 in tab 3). This number comes from tab 2, where you are provided information about total current liabilities, this is the denominator = 0.41. See my yellow highlights below. Operating revenue per adjusted discharge = Total Operating Revenues $53,500/5.50 (this number is a given, you do not have enough information to calculate the adjusted discharges) = $9727 Operating expense per adjusted discharge Total Operating Expense $54,000/5.50 (this number is a given, you do not have enough information to calculate the adjusted discharges) = $9818.18 [If the following graphics do not pop up, please try a different browser or my attachments, the transcription is provided above] You will also notice that I provided you some extra ratio formulas for your own knowledge (i.e., Day Cash on Hand etc.). ...
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Running head: RATIO ANALYSIS

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Ratio Analysis
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RATIO ANALYSIS

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Ratio Analysis
Financial ratios juxtapose the results in non-identical items of the financial statements. The
analysis of these ratios is made to come up with conclusions with regard to the financial performance,
leverage, liquidity, and asset utilization of an enterprise (Babalola & Abiola, 2013). It is broadly used since
it is mainly based on the data contained in the financial statements that are quite easy to acquire.
Moreover, the results can be contrasted to industry leverages or the results of benchmark organizations
in order to see how an enterprise is performing in comparison to other businesses.
Performance ratios (gross profit and net profit ratio) are ratios are gotten from the revenue and
total line items on the income statement, and calculate the capacity of an enterprise to generate profit.
Liquidity ratios (current and quick ratios) are ratios that contrast the line items in the balance sheet and
calculate the capacity of an organization to pay its bills on time. Leverage and coverage ratios (debt to
equity and times interest earned ratio) are ratios that are used to approximate the relative amounts of
equity, assets, and debt of an enterprise in addition to its capability to pay off its debts (Rakiće...

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