Gapenski Healthcare Finance Unit 3 , 3.5 Problem Solving

#3.5
Brandywine Homecare

Brandywine Homecare, a not-for-profit business, had revenues of $12 million in 2007. Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was $1.5 million. All revenues were collected in cash during the year and all expenses other than depreciation were paid in cash.

A. Construct Brandywine’s 2007 income statement.

Brandywine Homecare
Income statement
Month ending December 31, 2007
Revenue $12,000,000
Total revenue $12,000,000
Expenses:
Depreciation $ 1,500,000
Other 12,000,000 x 75/100 = 9,000,000
Total expenses= Depreciation + Other expenses= 1,500,000+ 9,000,000= $10,500,000
Total revenue – total expenses = Net income or Profit - 12,000,000- 10,500,000= 1,500,000

B. What were Brandywine’s 2007 net income, total profit margin, and cash flow?

The net income = $1,500,000. total profit margin= total margin and is equal with net income divided by total revenues.

$1,500,000/$12,000,000 = 0.125 or 12.5%
Each dollar of revenue produces 12.5% of net income or profit.
Cash flow= cash generated during the year The rough estimation of cash flow = net income + non -cash expenses, in this case,

$1,500,000 + $1,500,000 = 3,000,000
C. Now, suppose the company changed its depreciation calculation procedures (still within GAAP) such that its depreciation expense doubled. How would this change affect Brandywine’s net income, total profit margin, and cash flow?
Brandywine Homecare
Income statement with double depreciation expense:

Month ending December 31, 2007
Revenue $12,000,000
Total revenue $12,000,000
Expenses:
Depreciation $ 1,500,000x2= 3,000,000
Other 12,000,000 x 75/100 = 9,000,000
Total expenses= Depreciation + Other expenses= 1,500,000x2+ 9,000,000= $12,000,000
Total revenue – total expenses = Net income or Profit - 12,000,000- 12,000,000= 0

What