Question

Case 4.1: East Pacific Hospital Key concept: Computin concept: Computing basic financial ratios for a not-for-profit hospital he East Pacific Hospital, a nonprofit entity, has been experiencing declining operat- ing revenues, and the CEO is concerned about future financial performance. The most recent summary operations statement and balance sheet are shown here: East Pacific Hospital Operations Statement for Year Ended December 31, 2015 Revenues $96,000,000 Expenses 94,000,000 Operating income $2,000,000 East Pacific Hospital Balance Sheet December 31, 2015 and 2014 2015 2014 Assets Current assets Property, plant, and equipment Total assets $21,000,000 64,000,000 $85,000,000 $18,000,000 63,000,000 $81,000,000 Liabilities and net assets Liabilities Current liabilities Bonds payable Total liabilities Net assets $17,000,000 64,000,000 81,000,000 $14,000,000 65,000,000 79,000,000 4,000,000 2,000,000 Unrestricted net assets Total liabilities and net assets $85,000,000 $81,000,000

Answer 1

Answer:

Profit Margin Ratio = Operating Income / Revenues = 2000000/96000000 = 2.08%

2.08% profit margin is below the industry standard of 2.5%.Though not bad steps needed to curtail expenses and increase Revenue.

Return on Assets ratio = Operating Income / Avg. Total Assets

                                 = 2000000 / ( 85000000 + 81000000 ) / 2

                                 = 2000000 / 83000000

                                 = 2.41%

2.41% return is way below industry average of 8.3% which shows assets are not used efficiently to generate Revenues and thus lower profits.

Return on Equity = Operating Income / Avg. Total Equity

                         = 2000000 / ( 4000000 + 2000000 ) / 2

                       = 2000000 / 3000000

                         = 66.67%

      66.67% is way to good compared to industry's 5 %

The connection comes from double entry accounting concept and the below equation

Assets = Liabilities + equity

Basically Equity fluctuates with increase or decrease in Revenues and expenses.