P11.1 Entries of the Warren Clinic 2012 income statement are listed below in alphabetical order. Reorder the data in the proper format.
Bad bet expense $40,000
Depreciation expense 90,000
General/administrative expense 70,000
Interest expense 20,000
Nonoperating income 40,000
Net Income 30.000
Other Operating Revenue 10,000
Patient Service Revenue 440,000
Purchased Clinic Services 90,000
Salaries and Benefits 150,000
P11.2Consider the following income statement:
BestCare HMO statement of operations Year ended june 30,2011 ( in thousands)
premiums earned 26,682
interest and other income 242
total revenues 28,613
salaries and benefits 15,154
medical supplies and drugs 7,507
provision for bad debts 19
total expenses 27,395
net income 1,218
a.) how does this income statement differ from the one presented in exhibit 11.1?
b) did the best care spend 367,000 on new fixed assets during fiscal year 2011?? If not, what is the total economic rationale behind its reported depreciation expense?
c) explain the provision for bad debts entry
d) What is BestCare’s total margin? How can it be interpreted?
Here are some tips from my teacher:
P11.1 will give you pause. It too is time-consuming and requires your full attention. Q11.1 requires that you prepare an income statement in good format. Yes, as you have discovered in your reading, accountants are big on formats. This is to ensure transparency through consistency. Pretty much every year, I argue with my financial auditors about how to present some accounting event on the organization’s financial statements. Sometimes there is flexibility but most times they will point me to some pronouncement or rule that tells exactly how I must present certain items.
With this particular statement there are two “tricks” if you will. Otherwise, it is pretty straightforward. First, it would seem that bad debt should be presented as an expense. This “new” format, however, allows for bad debt losses to be listed as a deduction from revenue as opposed to an expense. So after listing patient service revenue, you will need to deduct bad debt expense to derive the net patient service revenue.
Second, non-operating income should be listed after operating income/loss is calculated. So, here is how it works procedurally: 1) list and total your revenues, 2) list and total your expenses, 3) calculate and list operating income by subtracting the total expenses from the total revenue, 4) add the non-operating income to derive net income. Note that if there was a non-operating expense it would be treated in the exact same way; it would be presented below the bottom line, so to speak.
To test your presentation, make sure that your operating income is a negative $10,000 (which is a loss) and your net income should be $30,000.
P11.2 requires you to think through what assumptions are behind BestCare’s (HMO) financial statements.
a) Think if this is the old or the new format and what type of income is being reported b) Think back on what depreciation really is . . . the loss of value or wear and tear on the fixed asset c) Again, reflect on what bad debt expense really is. d) A quotient formula . . . Total (profit) margin is defined as net income divided by total revenues.
So, is higher margin better?