Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan

17.4 Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan:

BestCare HMO Statement of Operations and Change in Net Assets

Year Ended June 30, 2011

(in thousands)

Revenue:

Premiums earned $26,682

Coinsurance $1,689

Interest and other income $242

Total revenue $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

Net assets, beginning of year $900

Net assets, end of year $2,118

BestCare HMO

Balance Sheet

Year Ended June 30, 2011

(in thousands)

Assets

Cash and cash equivalents $2,737

Net premiums receivable $821

Supplies $387

Total current assets $3,945

Net property and equipment $5,924

Total assets $9,869

Liabilities and Net Assets

Accounts payable - medical services $2,145

Accrued expenses $929

Notes payable $141

Current portion of long-term debt $241

Total current liabilities $3,456

Long-term debt $4,295

Total liabilities $7,751

Net assets - unrestricted (equity) $2,118

Total liabilities and net assets $9,869

a. Perform a Du Pont analysis on BestCare. Assume that the industry average ratios are as follows:

Total margin 3.8%

Total asset turnover 2.1

Equity multiplier 3.2

Return on equity (ROE) 25.5%

b. Calculate and interpret the following ratios for BestCare:

Industry average

Return on assets (ROA) 8.0%

Current ratio 1.3

Days cash on hand 41 days

Average collection period 7 days

Debt ratio 69%

Debt-to-equity ratio 2.2

Times interest earned (TIE) ratio 2.8

Fixed asset turnover ratio 5.2
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