Question

- Suppose that two hospitals are identical in all ways except that Hospital N is relatively new while Hospital O is relatively old. Which of the following statements about a comparative financial statement analysis is true? (Hint: Think about both the cost of assets over time and depreciation expense.)

            a.         Hospital N will report higher net income.

            b.         Hospital O will report higher net income.

            c.         Hospital N will report higher net fixed assets.

            d.         Hospital O will report higher net fixed assets.

            e.         Both b. and c. above are correct.

Answer 1

Answer e is Correct i.e both b and c are correct

As the Hospital O is old, it is stabilized in the market, it has its reputation build over the years and customer base, hence it will report higher net income on the back of higher revenue in comparison to Hotel N which is relatively new.

As the Hospital N is new and both hotels are identical, it will have the assets acquired at the current price. The asset of the Hospital O must have been bought years back at the lower cost(considering the inflation) and it has accumulation depreciation also which will reduce its net value in books in comparison to Hospital N

Therefore Hospital O will report higher net income and Hospital N will report higher net fixed Assets.