Chapter 18: Case Study
Test Your Knowledge
Note: See Excel documents for all.
1) The Hospital for Healthy Living (HHL) financial statements are in the Excel file named “ CH18_Financials_Templates.” During fiscal year 2019, HHL decides to outsource its information technology services to another company. By doing this outsourcing, HHL will be able to get rid of certain services and staff that cost the hospital $175,000 annually. There is an upfront cost to undertaking this venture, because the company must setup servers, backup systems, and e-mail accounts for HHL. Then, there are annual contract payments that HHL must make with the IT company. The Board of Directors has agreed to a 4-year contract. Management is entertaining two separate bids from two companies. The first requires a $250,000 payment for the initial conversion, and $100,000 per year afterwards. The other bid requires a $350,000 payment upfront, but only $75,000 annually. HHL has a 6% cost of capital. Which option should HHL choose?
2) The following transactions occurred during the year. Record these transactions.
a. HHL took out a long-term loan for $3 million.
b. HHL purchased $1 million in inventory with cash.
c. HHL purchased equipment that cost $150,000 on account. The equipment is expected to last 15 years and has no salvage value.
d. $540,865,000 (net of allowances and charity care) was billed for patient services. The hospital estimates that 5% of these bills will be bad debt.
e. $875,000 of inventory was used.
f. Donations of $400,000 were received in cash.
g. HHL pays in cash for a 2-year malpractice insurance premium at a cost of $5 million. Half of the premium is for next year, and the other is for the following year.
h. HHL pays $12,560,000 in accounts payable.
i. HHL workers earned $259,000,000 in wages for the year. The hospital paid out $282,000,000 in cash. It also paid out $60 million in benefits, all in cash.
j. The equipment purchased in question c above was paid for in cash.
k. $370,500,000 from bills sent to patients was received in cash.
l. HHL collected $25 million in outstanding patient bills in cash.
m. The Board is concerned that too much debt outstanding is bad for the organization. So they choose to accelerate their debt payments for the year. HHL paid out $51 million in long-term debt principal, and $3 million of interest in cash.
n. Depreciation for the year was recorded - $23 million for existing fixed assets. Also, calculate the new depreciation necessary for the new equipment purchased this year, assuming straight-line depreciation.
o. The contract with the IT company chosen is signed. The initial contract cost is paid, as well as the year 1 payment.
3) Using these transactions, create financial statements for HHL for 2019.
4) Calculate ratios for HHL to assess its financial strengths and weaknesses.