Consider this income statement: Green Valley Nursing Home, Inc. Statement of Inc
ID: 2405388 • Letter: C
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
Explanation / Answer
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 %