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State of Operation

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Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan:

BestCare HMO
Statement of Operation and Change in Net Assets
Year Ended June 30, 2007
(in thousand)

Revenue:
Premiums earned $26,682.00
Co-insurance $ 1,689.00
Interest and other income $ 242.00
Total revenue $28,613.00
Expenses:
Salaries and benefits $15,154.00
Medical supplies and drugs $ 7,507.00
Insurance $ 3,963.00
Provision for bad debts $ 19.00
Depreciation $ 367.00
Interest $ 385.00
Total expenses $27,395.00
Net income $ 1,218.00
Net assets, beginning of year $ 900.00
Net assets, end of year $ 2,118.00

_____________________________________________________________________________
BestCare HMO
Balance Sheet
June 30, 2007
(in thousands)

Assets
Cash and cash equivalents $ 2,737.00
Net premiums receivable $ 821.00
Supplies $ 387.00
Total current assets $ 3,945.00
Net property and equipment $ 5,924.00
Total assets $ 9,869.00

Liabilities and Net Assets
Accounts payable-medical services $ 2,145.00
Accrued expenses $ 929.00
Notes payable $ 141.00
Current portion of long-term debt $ 241.00
Total current liabilities $ 3,456.00
Long -term debt $ 4,295.00
Total liabilities $ 7,751.00
Net assets (equity) $ 2,118.00
Total liabilities and net assets $ 9,869.00

a. Perform a Du Pont analysis on BestCare HMO. Assume that the industry average ratios are as follows:
Total margin 3.8%
Total asset turnover 2.1
Equity multiplier 3.2
Return on Equity 25.5%
b. Calculate and interpret the following ratios for BestCare:

Industry Average
Return on assets (ROA) 8.0%
Current ratio 1.3
Days cash on hand 41 days
Average collection period 7 days
Debt ratio 69%
Debt-to-equity ratio 2.2%
Times interest earned (TIE) ratio 2.8
Fixed asset turnover ratio 5.2

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State of operations are examined for BestCare HMO.

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