Statements of cash flows.

Examine the River Community Hospital’s statements of cash flows. What information do the statements provide regarding the hospital’s sources and uses of cash over the past two years? Did River Community increase or decrease in their net cash flow from year to yea? The formula to calculate is (current year-past year)/past year. How about their cash flows from investing activity? What does that tell you? How about cash flow from financing activity? Did they increase or decrease their debt?

The next part requires you to calculate the following ratios listed below for years 2012 and 2013 (DO NOT calculate for 2011) and explain what information the ratio provides to the organization. Why are these ratios important to the organization?


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Liquidity ratios

Current Ratio
Days on cash hand

Profitability ratios

Total margin (or profit margin)
Return on assets

Explanation/Hint: You have to subtract depreciation amount from the operating expense, because depreciation is considered a non-cash expense component of the operating expense therefore you need to remove it from the operating expense. This is because no money was actually paid when expenses were incurred. However, you will notice that depreciation and noncash expenses are added back to the statement of cash flow under operating activities. Why is depreciation added back to the statement of cash flow?

The cash flow statement shows the flow of cash based on the three activities, operating activities, investing activities and financing activities. So this statement tells us where the cash is coming in and out of the organization. The cash flow statement will need to show this one-time purchase in their activities.

For example: Healthcare organization buys a MRI machine for $10,000 and the MRI machine has a useful life of 10 years (this mean at the end of 10 years, the MRI will no longer work, hypothetically speaking). So instead of showing a large purchase of $10,000, on the income statement it will be shown as a depreciation expense of $1,000 ($10,000/10) each year for the next 10 years. But on the cash flow statement, it will be shown as $10,000, because that was how much the healthcare organization paid for the MRI machine. This way, the company’s annual earnings will be higher, when you depreciate the expense of the MRI machine.

I have calculated the current ratio and the days on cash hand ratio for 2011 below:

Current ratio = 9.772/2.498 = 3.91

Days on cash hand = 4.673*365 = 1705.645 = 68.08

27.404 – 2.350 25.054

Profitability ratios for 2011

Total margin (or profit margin) = Net income/total revenue = (2.629/30.033)100 = 8.75%
Return on assets = net income/total assets = (2.629/45.7838)
100 = 5.75%

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