Prepare balance sheets for these two financial years. Arrange these statements like the balance sheets for the Barwon Health 2011 financial statements that are in the course materials – ie put the two years side by side. Make sure to distinguish between current and non-current assets and liabilities. All figures are in thousands of dollars.
Prepare income (profit and loss) statements for these two years for this organisation with the two statements side by side.
Identify two significant changes that occurred during this period. Do you think that this hospital is in a good position to pay its short term debts? Explain your answer.
Prepare a cashflow statement showing operating, investing and financing cashflows for these two financial years with the two statements side by side.
Did the hospital experience net cash inflows or net cash outflows for these financial years? Did the hospital make a profit or loss during these years? Briefly explain why these figures are different.
QUESTION 2 (10 MARKS)
The Glenlee Medical Practice is a bulk-billing medical practice providing GP services to patients. The practice is considering abandoning bulk billing – where it is paid a fee fixed by the government – and becoming a totally fee-for-service practice. You have been asked to prepare some estimates to establish whether this is worthwhile.
There are three doctors in partnership running the practice. In the year to 31 December 2015 the three doctors between them conducted 24,000 consultations (assume all consultations are identical).
If the practice bulk bills it receives $37 per consultation from the government and this is expected to be fixed until 31 December 2016. If the practice continues to bulk bill it is expected that consultations will increase to 26,000 for the year to 31 December 2016.
The receptionist’s salary is $60,000. If the practice continues to bulk bill, the receptionist will be required to work six hours a week overtime @ $15/hr. Overtime is treated as a variable expense.
Electricity is $5,000 per year plus 50 cents per consultation for each consultation in excess of 400 per week. Assume the practice operates 52 weeks per year and patient consultations are equally distributed during the year.
If the practice does not bulk bill it will charge $50 per consultation. Because of the higher consultation fee it is expected that consultations will fall to 21,060 for the 12 months to 30 December 2016.
Direct materials are $2 per consultation.
Telephone expense is $2,000 plus 10 cents per consultation.
Other variable costs are $3 per consultation.
Depreciation was $15,000 in 2015 and will be the same in 2016.
Rent is $1,000 per week
Other fixed overheads are $40,000 per year.
There is no need to take tax into consideration in this question.
a) What is the projected net profit under both alternatives – i.e. bulk-billing (at $37 per consultation) and non bulk billing (ie charging $50 per consultation) for the year to 31 December 2016?
b) If the government’s bulk billing rate changes to $40 per consultation, how does this influence your answer to (a)?
c) Assuming that the practice decides to charge the bulk billing rate of $37 per consultation, by how much does the Glenlee Medical Practice’s profit go down if variable costs increase by 50%? By how much does profit decrease if fixed costs increase by 50% and variable costs are at their original level? What does this tell you about the relative importance of fixed and variable costs? What was the impact of a change in the bulk billing rate from $37 to $40?
d) Write a report to the doctors giving recommendations about whether the practice should stop bulk billing.
Question 3 (5 marks)
You are considering setting up a solo GP practice. Your financial projections for the first year of operations are as follows:
Revenues (10,000 consultations) $400,000
Phone and electricity $2,500
Medical supplies $45,000
Office supplies $15,000.
Assume all costs are fixed except medical and office supplies that are variable and are the same for each of the 10,000 consultations. Also assume that the practice must pay tax of 30% on its profits.
Construct the practice’s expected profit and loss for the first year.
What number of consultations do you need to break-even?
What number of consultations would you need to give the practice an after-tax profit of $100,000?
Question 4 (5 marks)
In its first year of operations which ended on 30 June 2015, Eastern General Practice Ltd provided $145,000 in patient consultations, $43,000 of which had not been received from Medicare at year end. The remaining $102,000 was received before 30 June 2015 in cash from patients and Medicare. The practice incurred operating expenses of $54,000 during the year. Of these expenses, $5,000 was depreciation of equipment, $39,500 had been paid in cash; $9,500 was still owing to numerous creditors at year-end. In addition, on 26 June 2015, Eastern General Practice Ltd paid $13,500 in cash in advance for rent on the surgery for the months of July, August and September 2015. On 30 June 2015, the practice bought new computers for $10,000 cash.
Calculate the first year’s profit under the cash basis of accounting. (1 marks)
Calculate the first year’s profit under the accrual basis of accounting. (1 marks)
Which basis of accounting do you think is more useful for decision making? Explain your answer. (3 marks)
Question 5 (10 marks)
Choose appropriate account names and demonstrate how one transaction affects two ‘accounts’ in the accounting system. For example, if the owners of the business contributed $6,000 in cash to start the business it would increase Cash by $6,000 and increase owners’ equity by $6,000.
Borrowed $10,000 from the bank.
Received $2,000 income for patient services delivered last month.
Paid telephone account of $451.
Hospital sells vacant land for $15 million.
Purchased drugs on credit $68,000.
Provide services to patients for $250 and paid immediately.
Pay monthly salaries of $15,000
Bought office equipment for $8,000
Hospital receives government grant of $10 million.
Hospital chief executive buys flowers for wife for Valentine’s Day on his personal credit card.