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Unit 2 Application Assignment: Income Statement

Anita Ogbuji

HA516

Park University
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3.3
a. How does this income statement differ from the ones presented in Exhibit 3.1 and
Problem 3.2?
The Green Valley Nursing Home income statement is different from exhibit 3.1 and problem 3.2
in that their dollar amounts are the actual amounts reported and the other two report their dollar
amounts in thousands of dollars. Their income statement also ends December 31 and problem
3.2's ends June 30. Green Valley Nursing Home is a for profit investor owned organization based
on their income statement, because they reported $31,167 provision for income taxes and the
other statements did not have to pay income taxes.
b. Why does Green Valley show a provision for income taxes while the other two income
statements do not?

Green Valley shows provisions for income taxes because they are an investor owned business
and therefore have to pay taxes. The other two income statements do not show a provision for
income taxes because they are not-for-profits and therefore do not have to pay taxes.

c. What is Green Valley’s total profit margin? How does this value compare with the values
for Sunnyvale Clinic and BestCare?

To figure out the total profit margin for these businesses I took their net income and divided it by
their total margin.

Green Valley's total profit margin was $57,881/($89,048+$3,159,404)= $57,881/$3,248,452=


0.018= 1.8%

Sunnyvale's total profit margin for the year 2015 was $7,860,000/($169,979,000+$4,113,000)=
$7,860,000/$174,092,000= 0.045= 4.5%

BestCare's total profit margin was $1,237,000/$28,613,000= 0.043= 4.3%

Green Valley's total profit margin compared to that of Sunnyvale and BestCare was relatively
low. Green Valley only produced 1.8 cents of profit which means that each dollar of revenues
and income required 98.2 cents of expenses. Sunnyvale made 4.5 cents of profit and each dollar
of revenues and income required 95.5 cents of expenses and BestCare made 4.3 cents of profit
and each dollar of revenues and incomes required 95.7 cents of expenses.

d. The before-tax profit margin for Green Valley is operating income divided by total
revenues. Calculate Green Valley’s before-tax profit margin. Why might this be a better
measure of expense control when comparing an investor-owned business with a not- for-
profit business?

Green Valley's before-tax profit margin is 2.8%. To get Green Valley's before-tax profit margin I
took their operating income of $89,048 and divided it by their total revenue of $3,159,404.
$89,048/$3,159,404= 0.028= 2.8%. Taxes are not directly related to business operations, which
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is why comparisons of net profit margins with peer companies can be distorted by the impact of
effective tax rate. A tax system is beyond a manager's control and tax rates vary from state to
state. When taxes are included in the equation, businesses running equally efficiently may have
different profit margins. Pretax profit margin allows a more even profitability comparison
between businesses (Avenir, 2017).

3.5 Brandywine Homecare, a not-for-profit business, had revenues of $12 million in 2015.
Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense
was $1.5 million. All revenues were collected in cash during the year, and all expenses other
than depreciation were paid in cash.

a. Construct Brandywine's 2015 income statement.


b. What were Brandywine's net income, total profit margin, and cash flow?
c. Now, suppose the company changed its depreciation calculation procedures (still within
GAAP) such that its depreciation expense doubled. How would this change affect
Brandywine's net income, total profit margin, and cash flow?
d. Suppose the change had halved, rather than doubled, the firm's depreciation expense.
Now, what would be the impact on net income, total profit margin, and cash flow?
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References
Avenir, R. (2017, November 21). What Is a Pretax Profit Margin? Retrieved from
https://yourbusiness.azcentral.com/pretax-profit-margin-2887.html