Question

3. Using the income statement and balance sheet examples provided in the chapter, calculate the return on capital in 2013.

Table 3–1 Hospital Income Statement

ABC Hospital

Income Statement

August 31, 2013

Inpatient revenue

$1,500,300,000

Outpatient revenue

$430,320,200

Total patient revenue

$1,930,620,200

Deductions, discounts, and allowances

($1,000,000,000)

Net patient revenues

$930,620,200

Total operating expenses

($830,220,200)

Operating income

$100,400,000

Other income (donations, contributions, gifts)

$5,200,500

Income from investments

$15,000,500

Government appropriations

$0

Auxiliary and nonpatient revenue

$3,000,000

Total nonpatient revenue

$23,201,000

Total other expenses

($124,400,000)

Net income or (loss)

($799,000)

Table 3–2 Hospital Balance Sheet

2013 Assets

(Millions)

Current assets:

Cash and equivalents

$325

Short-term investments

$175

Accounts receivable, net

$550

Inventories

$250

Prepaid expenses

$50

Total current assets

$1,350

Long-term assets:

Land and buildings, net

$750

Property and equipment, net

$500

Investments

$200

Total long-term assets

$1,450

Total Assets

$2,800

Liabilities and Equity/Net Assets

Current liabilities:

Accounts payable

$360

Taxes and other payables

$40

Accrued liabilities

$80

Other short-term liabilities

$10

Total current liabilities

$490

Long-term liabilities:

Long-term debt

$180

Other long-term obligations

$20

Total long-term liabilities

$200

Total Liabilities

$690

Equity/net assets

$2,110

Total Liabilities and Net Assets

$2,800

The book is showing the answer as 3.6% but I can't figure out how to get that answer. Need assistance with breakdown.

Answer 1

Solution:

Return on capital

=Hospital operating margin* X Total asset turnover ratio** X 100

=0.105 X 0.340 X 100

=3.57 (Rounding to 1 decimal)

= 3.6 % (Answer)

*Hospital operating margin

=Operating Income / Total Revenue

= Operating Income / (Total patient revenue + Total nonpatient revenue)

=$ 100,400,000 / ($ 930,620,200 + $ 23,201,000)

= $ 100,400,000 / $ 953,821,200

=0.105

**Total asset turnover ratio

= Total Revenue / Total Assets

=$ 953,821,200 / $ 2,800,000,000

= 0.340

Note: Total Assets given as $ 2,800 million. So, can be written as $ 2,800,000,000.