# Analyzing the Financial Statement-Assignment Solution Sample

QUESTION

Analyzing the Statements:

Project Overview:

You work as a financial analyst in the Fiscal Services Department at Stronger Memorial Hospital. Your manager, Don Deruso, a certified public accountant (CPA) and chief financial officer at the hospital, recently received an unexpected visit from a local physician, Dr. Felicia Fiddle, who wants to sell her internal medicine practice to the hospital. Dr. Fiddle subsequently sent over a thick and disorganized file folder containing a variety of financial records from her practice. Don has asked you to help him determine if Dr. Fiddle’s practice is a sound business that Stronger Memorial Hospital should acquire. To do this, you will sort through Dr. Fiddle’s records to determine which ones should be included in financial statements about the practice, and then you will help the hospital accountant prepare materials pertaining to those financial statements. Finally, you will analyze the financial statements to determine if the hospital should acquire Dr. Fiddle’s practice.

Project Directions:

Lisa Ledger finally created financial statements that accurately reflect the financial state of Dr. Fiddle’s internal medicine practice and sent them to you and Don for your review. To prepare to make a final decision about whether to acquire the practice or not, Don has asked you to analyze the information contained in the financial statements. Take the following steps to analyze the statements:

1. Open and review the Project resource titled “Income Statement and Balance Sheet for Dr. Fiddle’s Medical Practice.” As you review, be sure to assess year-to-year trends.

2. Read the book chapters included in the Project resources to learn how to utilize financial ratios for financial statement analysis and business decision assessment.

3. Download the “Key Ratios to Analyze Financial Statements” document to review the selected ratios you will calculate in order to assess the financial state of Dr. Fiddle’s practice.

4. Watch the “Ratio Analysis” videos to learn how to complete the key ratio calculations.

5. Complete the calculations in the Key Ratios to Analyze Financial Statements document. Show your work and determine whether the trend from 2013 to 2014 for each calculation is better or worse.

Deliverables:

• Completed Key Ratio to Analyze Financial Statement Document attached as separate document to the email.

Project Resources:

## *Key Ratios to Analyze Financial Statements

Review this document in the email attachment to learn which selected ratios you will use to analyze Dr. Fiddle’s financial statements. Record your calculations and determine whether the trend from 2013 to 2014 is looking better or worse for each ratio.

## *Ratio Analysis Video, Part 1

Watch this video to see examples of how to calculate and interpret financial ratios.

## *Ratio Analysis Video, Part 2

Watch this video to see additional examples of how to calculate and interpret financial ratios.

## Rubric:

The Rubric is used to evaluate the Project. Please make sure all the listed rubrics are considered in the project.

 Criteria Accurately calculates the selected financial ratios in the Key Ratios to Analyze Financial Statements document Accurately assesses whether trends from 2013 to 2014 are better or worse for each financial ratio Shows the calculations performed in order to obtain each ratio value Selects the appropriate values from the financial statements to calculate the financial ratios in the Key Ratios to Analyze Financial Statements document Any sources of information are cited using APA format, with no major errors

Key Ratios to Analyze Financial Statements

 Ratio Definition 2014 Calculation 2013 Calculation Trend1 Liquidity Current (Current assets)/ (Current liabilities) Quick, or acid test (Current assets – supplies inventory)/ (Current liabilities) Debt Management Ratios Debt to total assets2 (Total debt)/(Total assets) Times interest earned (Net income plus interest charges)/(Interest charges) Asset Management Ratios Inventory turnover (Net patient service revenue)/(Supplies inventory) Average collection period (Accounts receivable)/(Net patient service revenues per day) Fixed assets turnover3 (Net patient service revenue)/(Fixed assets) Total assets turnover (Net patient service revenue)/(Total assets) Profitability Profit margin on revenue (Net income)/(Net patient service revenue) Return on total assets (Net income)/(Total assets) Return on equity (Net income)/(Equity)

1 In this column, indicate whether the financial statements trended better (B) or worse (W) from 2013 to 2014

2 “Debt” in this case is synonymous with “total liabilities”

3 “Fixed assets” in this case refer to “property and equipment”

Making the Call

Overview:

You work as a financial analyst in the Fiscal Services Department at Stronger Memorial Hospital. Your manager, Don Deruso, a certified public accountant (CPA) and chief financial officer at the hospital, recently received an unexpected visit from a local physician, Dr. Felicia Fiddle, who wants to sell her internal medicine practice to the hospital. Dr. Fiddle subsequently sent over a thick and disorganized file folder containing a variety of financial records from her practice. Don has asked you to help him determine if Dr. Fiddle’s practice is a sound business that Stronger Memorial Hospital should acquire. To do this, you will sort through Dr. Fiddle’s records to determine which ones should be included in financial statements about the practice, and then you will help the hospital accountant prepare materials pertaining to those financial statements. Finally, you will analyze the financial statements to determine if the hospital should acquire Dr. Fiddle’s practice.

Directions:

While you analyzed Dr. Fiddle’s financial statements, Don visited her practice to assess the viability of purchasing it. He made a number of notes about the state of the practice. Although Don needs to make the final decision about whether or not the hospital will acquire the practice, he has asked you to examine all of the information that you now have and make a recommendation about what the hospital should do. To develop your recommendation, take these steps:

• Does the practice generate enough cash to cover its current obligations?
• Is the practice likely to be able to meet its long-term obligations as they become due?
• Is the practice increasing its patient encounters and collecting its accounts receivable in a timely manner?
• What is the practice’s net worth, or equity, and is it improving? Is the practice improving its profitability on a sustainable basis?
• How might the hospital’s acquisition of Dr. Fiddle’s practice impact the future financial performance of the practice itself?
• All factors considered, do you think it is a good idea for the hospital to acquire the practice?  Why or why not?
2. Refer to Dr. Fiddle’s financial statements, the Key Financial Ratios document that you completed in Project 3 and the notes that Don took while on his site-visit. Identify key information Don recorded in his site visit notes. Then review the Project resources. Use all of this information to inform your response to each of Don’s questions.
3. Draft responses to each of his questions.
4. Once you have drafted your responses, develop a slide presentation that answers each of Don’s questions. Your slide presentation should incorporate the financial ratios you calculated, describe what the ratios say about the state of the practice, and appropriately use accounting terminology. Once you have completed the slides, present the slide presentation to Don by narrating it. For information on how to narrate your slide presentation, see the CfA Presentation Guide in the Project Resources.

Deliverables:

Narrated slide presentation.

Project Resources:

## *Income Statement and Balance Sheet for Dr. Fiddle’s Medical Practice

Refer to the information included in these financial statements to answer Don’s questions.

## *Doctors in Private Practices Are Now Joining Hospital Staffs

Read this article to learn why hospitals acquire physician practices and why physicians sell their practices to hospitals.

https://www.washingtonpost.com/national/health-science/doctors-in-private-practices-are-now-joining-hospital-staffs/2012/02/14/gIQAEFz07R_story.html?utm_term=.2592c6f960c5

## *Qualitative Considerations When Completing Financial Analysis

Read this article to learn how to balance quantitative and qualitative information when analyzing a financial situation.

## Rubric:

The Rubric is used to evaluate the Project. Please make sure all the listed rubrics are considered in the project.

 Accurately explains what the results of each financial ratio mean about the state of Dr. Fiddle’s practice Accurately and appropriately uses accounting terminology throughout the slide presentation Explains how Don’s notes from his site visit influenced the recommendations included in the slide presentation Accurately and appropriately incorporates accounting terminology into the audio narration of the slide presentation Accurately addresses each of Don’s questions by referencing the applicable financial statement and ratios Appropriately utilizes Don’s site-visit notes to inform final recommendation Incorporates clear and relevant text and images into slides Narrates presentation clearly and with accuracy Any sources of information are cited using APA format, with no major errors

Key Ratios to Analyze Financial Statement

 Ratio Definition 2014 Calculation 2013 Calculation Trend1 Liquidity Current (Current assets)/ (Current liabilities) 124775/87799 = 1.42 105125/62400 = 1.68 Decreasing (Worse) Quick, or acid test (Current assets – supplies inventory)/ (Current liabilities) (124775-30100)/87799 = 1.08 (105125-25340)/62400 = 1.28 Decreasing (Worse) Debt Management Ratios Debt to total assets2 (Total debt)/(Total assets) 181278/189451 =95.6 % 162900/170560 = 95.5 % Stagnant ( Area of Concern) Times interest earned (Net income plus interest charges)/(Interest charges) (513+2750)/2750 = 1.19 (-22555+819)/819 = -26.54 Increasing Significantly (Better) Asset Management Ratios Inventory turnover (Net patient service revenue)/(Supplies inventory) 310000/30100 = 10.30 336800/25340 = 13.30 Decreasing (Worse) Average collection period (Accounts receivable)/(Net patient service revenues per day) 75675/(310000/365) =89 days 56135/(336800/365) = 61 days Increased (Worse) Fixed assets turnover3 (Net patient service revenue)/(Fixed assets) 310000/47785 = 6.5 336800/65435 = 5.15 Increased (Better) Total assets turnover (Net patient service revenue)/(Total assets) 310000/189451 = 1.64 336800/170560 = 1.98 Decreasing (Worse) Profitability Profit margin on revenue (Net income)/(Net patient service revenue) 513/310000 = .17% -22555/336800 = -6.7% Increased Significantly ( Better) Return on total assets (Net income)/(Total assets) 513/189451 = .27% -22555/170560 = -13.2% Increased Significantly (Better) Return on equity (Net income)/(Equity) 513/8173 = 6.3% -22555/7660 = -294% Heavy Increase (Better)

1 In this column, indicate whether the financial statements trended better (B) or worse (W) from 2013 to 2014

2 “Debt” in this case is synonymous with “total liabilities”

3 “Fixed assets” in this case refer to “property and equipment”

MAKING THE CALL
ANALYSIS

Question 1: Does the practice generate enough Cash to cover its current obligations

Answer: In order to look and decided the availability of cash for current obligations we will look into the liquidity ratios which are best suited to achieve this

Finding 1:The quick ratio (1.08) as well as the current ratio (1.42) are both above 1 which portrays the assets of Dr Fiddle outweighs the current liabilities that she has, thus also securing the fact that there is enough cash or easily convertible to cash resources in hand to cover the current obligations

Finding 2: However as has been noted by Don in his visit notes of Dr Fiddle taking a voluntary large pay cut to improve the profitability margin night become an obstacle to an effective deduction as it may skew the ratios towards a better picture

Conclusion: Though the pay cut does remain a pain point that needs to be investigated in more detail but the backing of the last year’s data with no record of huge debt / asset sales recorded does support the fact that the current obligations can be met by the assets present

Question 2: Is the practice likely to meet its long term obligations as they become due

Answer: In order to look and decided the capacity to control the long term requirement we will look into the solvency ratios

Finding 1:If we look into the debt to equity ratio of 2014 we see that it comes to 22 times which shows that the debt far outweighs the equity held and is not a good sign at all

Finding 2: Also if we go deeper and find the ratio between (Net Income + Depreciation)/Liabilities (Short & Long) it comes to about .2% which is not a good figure

Finding 3: The debt to total asset which is signifying the amount of liabilities held by the company in ratio to its assets has remained stagnant which may be an area of concern

Conclusion: The above findings clearly show that the practice will not be able to cover its long term obligations until it finds a new source of revenue

Question 3: Is the practice increasing its patient encounters and collecting its accounts receivable in a timely manner?

Answer: To get an understanding of this we will check the revenues collected from the patients and the amount of time required to do so

Finding 1:The service revenue that pertains to the amount of revenue attained by serving the patient has reduced from 336800 \$ to 310000 \$ which shows a lesser patient inflow or an increase in credit allocation

Finding 2: To check for the credit scenario it is evident that the collection period has increased from 61 days to 89 days.This shows that the average time required to collect the revenue is increasing. Thus showing a worsening condition of revenue collection

Finding 3: Inventory Turnover has also decreased showing that the number of times the inventory is sold is reducing thus reducing the opportunities of higher income

Finding 4: Net asset turnover has decreased showing that the income per unit of asset has reduced. Which might mean lower income or an unequal increase between asset and income

Conclusion: As per the above data the practice seems to be decreasing in the number of patients served and also the average collection period is increasing. Both of them do not bode well

Question 4: What is the practice’s net worth, or equity, and is it improving? Is the practice improving its profitability on a sustainable basis?

Answer: We will look into both the present and future perspective to decide this

Finding 1: The equity year on year has increased from 7660 \$ to 8173 \$ whereas the net worth has also increased from 170560\$ to 189451\$ both of which give an optimistic picture

Finding 2: One of the hiccups towards coming to the solution is the large one time insurance disbursed to Dr Fiddle which might skew the assets partially.

Finding 3: The return on Equity has almost increased by 300 % which shows the amount of income per unit of share / equity is a huge boost towards sustainable profitability

Finding 4: While the above mentioned points do give a technical lookout the note in Don’s memo about the potential patent device may be a game changer and if truly successful may become a huge source of income both for Dr. Fiddle and the hospital

Finding 5: The profit Margin on revenue that determines the profit that you are making as part of the total revenue ha also increased from -6.7 % to .17% which is really good for the business

Conclusion: The practice seems to be doing quite well with some big future possibilities. With the right nudge it might become a success

Question 5: How might the hospital’s acquisition of Dr. Fiddle’s practice impact the future financial performance of the practice itself?

Answer: This is a question that needs to be answerer based on the qualitative perceptions and making a few assumptions

Finding 1:The majority of this exercise depended on the lackluster way in which the accounts were handled by Dr. Fiddle which might have led her to undervalue ( painting) many things as well as have no idea of the financial situation of the business. Affiliating with the hospital will give her access to a dedicated accountant who will be able to better maintain the finances and thus lead the financial aspect of the practice in a better way

Finding 2: The close location of the hospital to the practise will help her to continue the ease and coordination that she enjoyed that made her to refer many of her patients to the hospital

Finding 3: With her prime aim of the patented technology coming close to fruition she might have much more financial backing as well as better infrastructure to confirm the successful completion in the hospital

Finding 4: Being a sole proprietor she had unlimited liability in her practice. This will now be shared among the board of directors as part of the hospital. Also she will be free from the ups and downs of the market and have the security of a fixed pay

Conclusion: Taking all this into account it does seem that the induction into the hospital will truly be a win win scenario for Dr Fiddle

Question 6: All factors considered, do you think it is a good idea for the hospital to acquire the practice?  Why or why not?

Answer: Lets look into this from the future perspective and the opportunities to the hospital

Finding 1:Majority of the ratios and financial findings about Dr Fiddles practice point toward the positive note with a huge jump (300%) in the profit margins. This confirms there are very few red flags to be concerned about

Finding 2: The patented technology if becomes a success will become a huge source of fame and money for the hospital. As it is written that it is near completion is more the reason to bring her in

Finding 3: She is quite the good doctor which is evident in the number of patients that she sends every month. If she is not acquired these will be sent to the competitor resulting in a huge loss to the hospital

Finding 4: The place she practices is a prime location and can be used as an extension of the hospital if needed

Conclusion: As per the above analysis it does seem that the positives far outweigh the negatives in this case and thus the hospital should acquire the practice

REFERENCES

Bernadi, Richards and Kimberly, Collins (2018). ‘Leveling the playing field’ when ranking accounting. Retrieved on 18th December 2018
https://www.sciencedirect.com/science/article/pii/S0748575117302476

Samuel, Sanjay (2018) ‘A conceptual framework of teaching management accounting’
Retrieved on 18th December 2018