Cash A/P Retained Earnings DR CR DR CR DR CR _ _ _
Expense Revenue DR CR DR CR _ _
4 Debits and Credits
The debit/ credit method allows the entry of only positive numbers whether this results in an increase or decrease in the account depends on the type of account.
Left is a debit right is a credit purely a convention.
Every accounting transaction affects at least two accounts with balancing debits and credits. Thats why it is termed double entry.
Accounts are info units used in tracking accounting events e.g. A/R.
All of the accounts used in the business make up the general ledger.
The chart of accounts lists all accounts used in the general ledger along with reference numbers.
A journal is a record of a transaction with related debits/ credits to accounts.
6 Income accounts -- temporary
Product A sales
Product B sales
Sales returns/ allowances
Income tax expense
Bad debt expense
Cost of goods sold (COGS)
What happens when the reporting period ends
7 Income accounts and closing Assets Liability Owners Equity
Cash A/P Retained Earnings DR CR DR CR DR CR _ _ _
Expense Revenue On close add income statement items to retained earnings zero income accounts DR CR DR CR _ _
8 Extraordinary income gain/(loss)
These items are both unusual and infrequent e.g.
natural disasters (TS Allison)
effect of discontinuing certain operations (Circuit City or Kmart store closures)
major legal settlements (IBMs antitrust settlement)
Extraordinary items should be non-recurring -- in fact that is one term for them.
9 Questions Health care income concepts
How do gross and net revenues differ
Is charity care a kind of bad debt
Where do you find charity care on a hospital income statement Bad debt
What kinds of items are included in other as opposed to patient revenue
HMOs do not have patient revenues what do they have instead
When comparing FP and NFP hospitals what is a good measure of expense control
How does depreciation affect taxes Cash
10 Chapter 3 Problem 3.2 ab
3.2 a. Key difference is in the listing of revenues. HMO revenues are listed as premiums earned and coinsurance -- not as net patient service revenue. Expense categories are about the same.
b. No. The 367000 depreciation expense recognizes wear and tear experienced during the year. Depreciation calculations may not reflect the actual change in asset market value.
11 Chapter 3 Problem 3.2 cd
c. BestCare expects not all contract revenues will be collected. Estimated uncollectible revenues 19000 is listed as an expense item called provision for bad debts.
d. Total profit margin net income/ total revenues.
BestCares total profit margin for 2004 was 1218 / 28613 0.043 4.3. Each of revenue produced 4.3 cents of earnings.
The higher the total profit margin the better the organizations expense control.
12 Chapter 3 Problem 3.3 a b 3.3 a. Lines are added that contain the operating (taxable) income and provision for income taxes entries -- Green Valley is a FP. Green Valleys implied tax rate is 31167 / 89048 0.350 35.0. b. See above. 13 Chapter 3 Problem 3.3 c c. Green Valleys total profit margin was 57881 / 3269404 0.018 1.8 significantly lower than the 2004 total profit margins of Sunnyvale (4.5 percent) and BestCare (4.3 percent). Profitability depends many things but ceteris paribus FPs would have lower total profit margins than NFPs. 14 Chapter 3 Problem 3.3 d
d. Green Valleys before-tax profit margin
89048 / 3269404 0.027 2.7.
Before-tax margin removes the influence of taxes and is a better measure of expense control when comparing FPs and NFPs.
15 Chapter 3 Problem 3.4 3.4 a. With net income of 2.4M on total revenues of 30M total expenses must be 30 2.4 27.6M. b. With 1 million in noncash expenses (depreciation) cash expenses 26.6M. c. Using only income statement data cash flow can be approximated as Net income Noncash expenses Net income Depreciation. For Great Forks Cash flow 2.4 1.0 3.4M. 16 Chapter 3 Problem 3.5 a 3.5 a. Brandywines 2004 IS (M) Total revenues 12.0 Expenses All but depreciation (75) 9.0 Depreciation expense 1.5 Total expenses 10.5 Net income 1.5 17 Chapter 3 Problem 3.5 bcd b. NI 12.0 9.0 1.5 1.5 M TPM NI / Tot rev 1.5 / 12.0 0.125 12.5 Cash flow NI Depr 1.5 1.5 3.0M
NI 12.0 9.0 3.0 0.
TPM 0 / 12.0 0.
Cash flow 0 3.0
d. NI 12.0 9.0 0.75 2.25 M TPM 2.25 / 12.0 0.188 18.8 Cash flow 2.25 0.75 3.0 M 18 Chapter 3 Problem 3.6
MainLines 2004 IS (M)
Total revenues 12.0
All but depreciation (75) 9.0
Depreciation expense 1.5
Total expenses 10.5
Operating income 1.5
Taxes (40) 0.6
Net income 0.9
19 Chapter 3 Problem 3.6 bcd b. NI 12.0 9.0 1.5 (12-9-1.5)x 0.4 0.9M TPM NI / Tot rev 0.9 / 12.0 0.075 7.5 Cash flow NI Depr 0.9 1.5 2.4M
NI 12.0 9.0 3.0 (12 9 3) x (0.4) 0
TPM 0 / 12.0 0.
Cash flow 0 3.0 3.0M
d. NI 12.09.00.75(12-9-.075) x 0.41.35M TPM 1.35 / 12.0 0.112 11.2 Cash flow 1.35 0.75 2.1 M FP impact depr has on NI cash flow
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