Question

P2-3. Use Community Health Systems operates general acute care hospitals in communities company reports the following information in Schedule II of its 2015 10-K Additional Information from 10-K to Explain Linkages Among Financial Statemen LO1, 2, 5, 6 Community Heal Systems (CYH) across the United SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS Balance at Acquisitions Beginning and Bad Debt Write- at End of Year Dispositions Expense Offs of Year $ millions December 31, 2015, allowance for doubtful accounts December 31, 2014, allowance for doubtful accounts .. $3,504 2,438 2,191 $(17) $3,168 $2,545) $4,110 3,022 (2,916) 3,504 2,034(1,787) 2,438 960 mber 31, 2013, allowance for doubtful accounts Accounts receivable represents the amount customers owe Community Health Systems for services rendered. The balance in the allowance for doubtful accounts is the company's best estimate of the amount that customers will not repay Community Health Systems' balance sheet and income statements reported the following information: $ millions Revenue.... Operating income before tax 2015 2014 2013 $22,564 $21,561 $14,853 917 . 26,861 27,421 17,117 Required a. Compute the common-size allowance for doubtful accounts for each year. Compare 2015 to the prior years; what do we observe? What is one conclusion analysts might draw from this analysis? b. On average, the firms in the S&P500 report common-size allowance for doubtful accounts between 3% and5%. Why might Community Health Systems ratio be so much higher? How could an analyst verify this inference? c. Compute the common-size bad debt expense for each year. Interpret the ratio for 2015. What trend do we observe? d. If the company had recorded bad debt expense of S2.668 in 2015 (which is $500 less of bad debt expense), what would the company have reported for operating income before tax? How would re- tained earnings have been affected? How is cash from operations affected? For this question, ignore tax effects.

Answer 1

a) Common size allowance for doubtful debts:-

                                                2015                       2014                       2013

Revenues :-                        22564                    21501                    14854

Bad Debts:-                        4110                       3504                       2438

Revenue /Bad Debts as %18.21%              16.30%                  16.41%

Increase in bad debts:- 606                         1066      

Increase/(Decrease

in Bad debts as %)    -76.83                          175%

(606-1066)/1066               (1066-606)/606

Revenue increase            1003                       6703

Revenue as a increase %4.08%                  45.13%

Bad debt are increased in 2014 by 175% and sales also increase in 45.13%

Bad debt are increased In 2015 by -76.83              and Sales increased by 4.08%

It is concluded that the the bad debts are increasing but the revenue is not increasing in same manner.

b) Bad debts are high when compared to other industry:-

This is due to low income of the patients, because of the low income they are not able to pay total amount of bill

And one more reason is they are not insured , because of no insurance they may not able to pay the bills

It can be reduced by increasing their revenues and encourage to take health insurance policy.

c) what trend would you observe?

It is observed that the revenue increased in 2015 by 4.08% but the 2014 was 45.13%

It is observed the there is no specific trend in revenues.

Bad debt are reduced by -76.83% in 2015 and Increased by         175% 2014

d) If bad debt reduced by 500:- then the operation income before tax will increase by 500 i.e1837