Week 4 Problems

12.1: Middleton Clinic had total assets of $500,000 and an equity balance of
$350,000 at the end of 2007. One year later, at the end of 2008, the clinic
had $575,000 in assets and $380,000 in equity. What was the clinics dollar
growth in assets during 2008, and how was this growth financed?

Middleton Clinic experienced a $75,000 growth in assets (difference of

total assets in 2007 were $500,000 from total assets in 2008 of $575,000).
Assets are the resources owned by a company that will generate income for
them in the future. To explain how this growth was financed, we have to look
at the liabilities and equity:
Liabilities at the end of each respective year are calculated as shown:
2007: Liabilities = assets equity
x = $500,000 - $350,000
x = $150,000
2008: Liabilities = assets equity
x = $575,000 - $380,000
x = $195,000
Difference in liabilities between both years: $45,000 ($195,000 - $150,000)
Equity in 2007 was $350,000 while the equity at the end of 2008 is
$380,000. The difference in equity between both years is $35,000.
Total increase in liabilities and equity from 2007 to 2008 was $75,000.
The growth in assets was fully financed by both liabilities and
assets.

12.2: San Mateo Healthcare had an equity balance of $1.38 million at the
beginning of the year. At the end of the year, its equity balance was $1.98
million. Assume that San Mateo is a not-for-profit organization. What was its
net income for the period?

Net income is calculated by deducting expenses from the total revenues of

the company. Net income can also be calculated by taking the difference of
equity from the starting point to the ending point of a period of time and
considering drawings. This is because equity is the amount which is owner-
invested in the company and factors in net income.

Net income = equity at the end equity in the beginning + drawings

X = $1.98 million - $1.38 million + $0
X = $0.60 million

Net income is $600,000

12.3: Here is financial statement information on four not-for-profit clinics:

Pittman Rose Beckman Jaffe

December 31, 2007:
Assets $ 80,000 $ 100,000 g $ 150,000
Liabilities 50,000 d $ 75,000 j
Equity a 60,000 45,000 90,000

December 31, 2008:

Assets b 130,000 180,000 k
Liabilities 55,000 62,000 h 80,000
Equity 45,000 e 110,000 145,000

During 2008:
Total revenues c 400,000 i 500,000
Total expenses 330,000 f 360,000 l

A = $30,000 Equity = assets liabilities

X = $80,000 - $50,000
X = $30,000

B = $100,000 Equity = assets liabilities

$45,000 = X - $55,000
$100,000 = X

C = $345,000 Total revenues = net income + total expenses

X = $15,000 + $330,000
X = $345,000

Net income = equity at end equity in beginning +

drawings
X = $45,000 - $30,000 + 0
X = $15,000

D = $40,000 Equity = assets liabilities

$60,000 = $100,000 X
 X = $40,000

E = $68,000 Equity = assets liabilities

X = $130,000 - $62,000 = $68,000

F = $392,000 Net income = equity at end equity in beginning +

drawings
X = $68,000 - $60,000 + $0
X = $8,000
Total expense = total revenue net income
X = $400,000 - $8,000
X = $392,000

G = $120,000 Equity = assets liabilities

$45,000 = X - $75,000
X = $120,000

H = $70,000 Equity = assets liabilities

$110,000 = $180,000 X
X = $70,000

I = $425,000 Net income = equity at end equity in beginning +

drawings
X = $110,000 - $45,000 + $0
X = $65,000
Total expense = total revenue net income
X = $65,000 + $360,000
X = $425,000

J = $60,000 Equity = assets liabilities

$90,000 = $150,000 X
X = $60,000

K = $225,000 Equity = assets liabilities

$145,000 = x - $80,000
X = $225,000

L = $445,000 Net income = equity at end equity in beginning +

drawings
X = $145,000 - $90,000 + $0
X = $55,000
Total expense = total revenue net income
X = $500,000 - $55,000
X = $445,000
12.4: Warren Clinics balance sheet:

Liabilities: Amount Assets Amount

($) ($)
Equity $230,000 Net property and $150,00
equipment 0
Long term debt $120,000 Long term investments $100,00
0
Other long term liabilities $10,000 Accounts receivable $60,000
Account payable $20,000 Cash $30,000
Other assets $40,000
Total liabilities and $380,00 Total assets $380,0
equity 0 000

This balance sheet makes sense because total assets are supposed to be
equal to total liabilities and equity which is the case for Warren Clinic

12.5:
a) The balance sheet for BestCareHMO is different than Park Ridge Homecare
in that this balance sheet is an assessment for just June 30, 2008 meaning
that it is the balance sheet for the first 6 months of 2008. Park Ridge
Homecares balance sheet (table 12.1) shows that it includes both 2007 and
2008 so it differs from BCHMO because it is two rather than just 6 months.
Another difference between the balance sheet is BHCMOs balance sheet lists
net property and equipment after deducting the accumulated depreciation
where the Park Ridge Homecare lists the depreciation and the actual amount
of property separately .

b) The debt ratio for Best Cares HMO is 43.52% which is higher than the
debt ratio for Park Ridge HomeCare which is $13.04% -- there is a 30.48%
difference in debt ratio percentage. For BestCare HMO, their total assets are
$9,869,000 and 43.52% of that is being financed by long term debt which
is $4,295,000. For Park Ridge Homecare, their total assets are $1,181,000
and of that, 13.04% are being financed by long term debts, which is
$154,000.

Best Cares Debt ratio:

Long term debt = $4,295,000
Total assets = $9,869,000
Debt ratio = $4,295,000/$9,869,000 = 43.52%
Park Ridge Homecares ratio:
Long term debt: $154,000
Total assets: $1,181,000
Debt ratio = $154,000/$1,181,000 = 13.04%

12.6:
a)
The balance sheet of Green Valley Nursing Home is different from Park Ridge
Homecares balance sheet in the following ways:
Park Ridge Homecares balance sheet includes both 2007 and 2008
years while Green Valley Nursing Homes balance sheet includes one
year data, since it is reporting it on December 31, 2008
On PRHs balance sheet, it shows an equity value whereas in GVNHs
balance sheet, it shows the shareholders equity which contains both
the common stock and the retained earnings.

The balance sheet of GVNH is different form BHCMO in these following ways:
The timeline of GVNH includes one entire year (since it reports its
findings in December) while in BHCMO, it only includes 6 months
GVNH lists the accumulated depreciation of its property and equipment
so it can be deducted to calculate the amount of net property and
equipment whereas BHCMO doesnt list the depreciation and instead
already calculates it as a part of the net property and equipment
amount listed.

b) Debt ratio: Green Valley Nursing Homes debt ratio is 67.92%, which is the
highest percentage of the debt ratios compared. This means that of Green
Valley Nursing homes total assets of $2,502,992, 67.92% are financed by
long term debts which is $1,700,000. Green Valley Nursing Home has the
most in terms of amount of assets that are being financed by long term
debts. There is a 24.40% increase in debt ratio percentage between GVNHI
and BHCMO (67.92% - 43.52%). There is a 54.88% increase in the debt ratio
between GVNH and PRH.

Best Cares Debt ratio:

Long term debt = $4,295,000
Total assets = $9,869,000
Debt ratio = $4,295,000/$9,869,000 = 43.52%

Park Ridge Homecares ratio:

Long term debt: $154,000
Total assets: $1,181,000
Debt ratio = $154,000/$1,181,000 = 13.04%

Green Valley Nursing Home ratio:

Long term debt: $1,700,000
Total assets: $2,502,992
Debt ratio = $1,700,000/2,502,992= 67.92%