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Use the Ratio Analysis Form to complete the following:

• Define each of the following ratios:

o Current ratio

o Quick ratio

o Debt service coverage ratio

o Operating margin

o Return on total assets

• Explain the purpose of each ratio.

• Compute the following ratios from Drs. Smith & Brown’s financial statements

o Current ratio

o Quick ratio

o Debt service coverage ratio

o Operating margin

o Return on total assets

• Explain what these ratios tell you about the status of the organization. Compare to the median hospitals.

Use the financial statements for Drs. Smith and Brown to perform the calculations and complete the form.

Review the following example on how to perform the inventory turnover calculation, which shows you how to complete the table.

• Two different methods can determine the inventory turnover ratio.

o Cost of goods sold—operating revenue of a hospital—divided by ending inventory

o Total revenues plus net nonoperating gains divided by ending inventory

This example uses the first method to perform the calculation.

Because a hospital provides a service, we would find the number that reflects services provided. Total operating revenue reflects money that is earned for providing services. Locate the Statement of Net Income on the student website. Find the total operating revenue. This is $180,000. Then, locate the ending inventory number. To find the ending Inventory use the Balance Sheet. The ending inventory number is 5000.

Cost of goods sold—operating revenue: 180,000 divided by ending inventory of 5000; 180,000/5000 = 36

• Place this information in the table. You will do the same with the rest of the ratios. Take the result of your calculations and place in the grid, as in the example.

• In addition, you are responsible for stating whether the ratios are solvency, leverage, or profitability ratios. Enter your answers in the appropriate column. Then, explain what these ratios tell us about the physician group practice.

Note. You will use the financial statements of Drs. Smith & Brown to perform the calculations on the next page. To calculate the debt service coverage ratio, you need the maximum annual debt service, which is $22,200.

The following table shows the median financial ratios for acute care hospitals. You can use this table to gauge the financial viability of the physician group practice.

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|Ratio |Numbers from Arcadia financial |Result |Is it a liquidity, |Define the ratio and explain what the result shown in Column 3 means to the organization. Do not forget to |

| |statement | |solvency, or |provide your references at the bottom of the form. |

| | | |profitability | |

| | | |ratio? | |

|Quick ratio |70000-5000/30000 |2.17 times |liquidity |Current assets less inventory divided by current liabilities. |

| | | | |It shows that business has 2.17 dollars of liquid assets to pay |

| | | | |each dollar of current liabilities. |

| | | | |It is quite below the industrial average of 110%. |

|Debt service coverage |80000/22,200 |3.6 times |Solvency |Net operating income divided by debt payments. It shows |

|ratio | | | |How much company is earnings as compared to its debt repayments? |

| | | | |The business is earning 3.6 times of its debt repayments. It is |

| | | | |Quite satisfactory. |

| | | | | |

|Operating margin |80000/180000 |44.44% |profitability |Operating income divided by total revenues. It shows the relationship of |

| | | | |of operating income to total revenue. It is around 44% of |

| | | | |total revenue. |

| | | | |It is quite below the industrial average of 110% |

|Return on total assets |80000/1000000 |8% |profitability |Net income divided by total assets. It shows the effective utilization |

| | | | |of total assets. |

| | | | | |

| | | | | |

| | | | | |

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Cite sources if any.



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