Now that we have generated the financial statements and the notes to the financial statements, we can use the information within the schedules to assess the financial health of the organization. One of the most useful and widely used techniques for assessing financial health and comparing organizations is through the use of Ratio Analysis. Ratios can disclose strengths and weaknesses and be used to compare one organization to another.
A ratio is a comparison of any two numbers. The most important ratios in the healthcare industry are liquidity, profitability and efficiency ratios. This module will introduce you to these ratios, their use and what a ratio analysis can reveal about an organization.
1- Read chapter 14 in your text.
2- View the Panopto lecture on Ratio Analysis.
3- Complete the deliverables below and submit via Canvas no later than Thursday, March 1 by 6:00pm.
1- To complete this module, use the financial statements found in the back of your text on pages 196- 198 (table 18-1 Statement of Financial Position; table 18-2 Statement of Operations; table 18-3 Statement of Cash Flows).
2- In this module are templates for Profitability ratios, Efficiency ratios and Liquidity ratios. All these templates are in excel format. You will populate the areas in “red” and the ratios will automatically be formatted for you. Please populate all three ratio analysis templates for the information displayed in the year 2013.
3- Some of the terms used in the templates may vary from the terms you are used to or the terms used in your text. Here are some hints:
a. Marketable securities- not all organizations have marketable securities- if this hospital does not, you enter 0.
b. Operating expenses in Happy Hospital = total expenses.
c. Bad debt and uncollectible are used interchangeably in many organizations.
d. Total net income is the Operating Income or loss. If the organization incurred a net loss, you would enter the number as a negative (for example: - 222,222).
4- Please answer the following questions. Each question can be answered in 1-2 sentences of bullets.
a. Liquidity ratios
i. To calculate, Days cash on hand, bad debts and depreciation are removed from the denominator? Why?
ii. What do liquidity ratios tell us?
iii. Why would too much liquidity be a problem for an organization?
iv. Why would too little liquidity be a problem for an organization?
v. What can you say about Happy Hospital’s liquidity in 2013? Please substantiate your opinion.
b. Profitability ratio
i. Discuss when and why different profitability ratios might be used?
ii. What does the return on asset ratio tell us?
iii. What can you say about Happy Hospital’s profitability in 2013? Please substantiate your opinion.
c. Efficiency ratio
i. Why is the timely collection of Accounts Receivable an issue for healthcare organizations?
ii. Why should the days in accounts payable be longer than the days in accounts receivable?
iii. What can you say about Happy Hospital’s efficiency in 2013? Please substantiate your opinion.
d. Overall evaluation
i. Based on your ratio analysis of Happy Hospital’s 2013 financial position, what is your overall impression of the financial “health” of this organization? Please substantiate your opinion with facts from the ratio analysis.
These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice. Unethical use is strictly forbidden.A1. Both bad debts and depreciation expenses are removed from total operating expenses when computing for the Days Cash On Hand ratio because both items are non-cash in nature. The ratio aims to compute for the number of days ‘cash and cash equivalents’ will last without any additional cash inflows, thus, non-cash items are excluded.
A2. Liquidity ratios provide insights regarding an entity’s ability to pay currently maturing debts or obligations from current assets.
A3. Too much liquidity, which means an organization is holding excessive cash and cash equivalents (and current assets in essence) against current liabilities, may be interpreted as an inability of the organization to take advantage of short- or long-term income generating opportunities since it decided to keep cash instead of investing the same.
A4. In my opinion, understanding the risks involved in having too little liquidity is a no-brainer to anyone. Needless to point out, if an entity runs out of resources to pay its currently maturing debts, it is insolvent; this insolvency may be taken advantage of by creditors to force the entity into bankruptcy. Hence, there is a need for the finance manager to look into the appropriate cash and cash equivalents balance to maintain, especially for purposes of paying operating expenses.
A5. Happy Hospital’s liquidity ratios are the following: current ratio is 2.89, quick ratio is...
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Solution.docx and Solution.xlsx.