Question

Consider this income statement: Green Valley Nursing Home, Inc. Statement of Income Year Ended December 31,2011

Revenue:

Net patient service revenue $3,163,258

Other revenue 106,146

Total revenues $3,269,404

Expenses:

Salaries and benefits $1,515,438

Medical supplies and drugs 966,781

Insurance and other 296,357

Provision for bad debts 110,000

Depreciation 85,000

Interest 206,780

Total expenses $3,180,356

Operating income $89,048

Provision for income taxes 31,167

Net income $57,881

1. WHAT IS THE PRIMARY DIFFERENCE

2. WHAT TYPE OF ENTITY IS GREEN VALLEY?

3. WHAT IS GREEN VALLEY'S TOTAL PROFIT MARGIN

4. HOW DOES IT COMPARE TO COMPETITORS

5. WHAT IS GREEN VALLEY'S BEFORE TAX PROFIT MARGIN

** PLEASE SEE COMPETITOR INCOME STATEMENT BELOW*********

Bestcare HMO statement of operations Year ended june 30,2011 ( in thousands)

Revenue

premiums earned 26,682

coinsurance 1,689

interest and other income 242

total revenues 28,613

Expenses

salaries and benefits 15,154

medical supplies and drugs 7,507

insurance 3,963

provision for bad debts 19

depreciation 367

interest 385

total expenses 27,395

net income 1,218

Answer 1

1. WHAT IS THE PRIMARY DIFFERENCE

Ans. Thera are basically two method to prepare income statement namely single step method and multi step method. The above statement is prepared using single step mehod, where it is simply reporting revenues in one section and expense in another, yeilding the net income. Unlike multi step model, there is no classification with respect to Operating income/expense and Non Operating Income or Expense, due to which investors are left without any real concept of profitability. While the benefit of using multi step model is better presentation of income statement as it offers detailed information about the gross profit and operating profit of the company.

2. WHAT TYPE OF ENTITY IS GREEN VALLEY?

Ans. Green Valley nursing home is investor owned (for profit) entity as it income statement is showing provision for income tax which implies that it is a taxable entity unlike non profit hospitals which gets exemption from federal income tax.

3. WHAT IS GREEN VALLEY'S TOTAL PROFIT MARGIN

Ans.Green Valley Total Profit Margin = Net Income / Total Revenue

= ($57,881 / $3,269,404) * 100

= 1.77 %

4. HOW DOES IT COMPARE TO COMPETITORS

Ans. Best Care HMO Total Profit Margin = Net Income / Total Revenue

= ($1,218 / $28,613) * 100

= 4.26%

The Total profit margin of Green Valley is lower than Bestcare HMO Total profit margin as it seems from the income statement that Best care HMO is not for profit entity and getting tax exemption and hence its net income to total revenue ratio is more than Green Valley's.

5. WHAT IS GREEN VALLEY'S BEFORE TAX PROFIT MARGIN

Ans. Green Valley's Before Tax Profit Margin = Operating Income / Total Revenue

= ($89,048 / $3,269,404) * 100

= 2.72 %