Part # 1:
The net operating income is calculated by deducting the operating expenses from the operating revenue. This is calculated before deducting the income tax and interest payments. The formula used for the calculation of the new operating income is as follow (Besley & Brigham, 2007):
Net Operating Income = Net operating revenue – net operating income
In reference to the case of the hospital under discussion, amount which will be paid by the hospital for different type of cases are given in the table below:
Next the total revenue which will be generated from the cases is given in the table below:
In order to find the total revenue generated from the cases by the hospital it is first essential to calculate the total deductions which will be made from the revenue generated from the cases, then by deducting this value from the revenue will result in the generation of the total operating revenue as shown below:
The total operating revenue will be then:
Operating Revenue: Revenue – Deductions:
Operating Revenue: 250000 – 32000
Operating Revenue: 218000
Next, the total operating expenses of all cases have been calculated, as presented in the table below:
Hence, in order to calculate the net operating income the values have been placed in the following formula:
Net Operating Income = Net operating revenue – net operating income
Net Operating Income = 218000 – 220000
Net Operating Income = (2000)
This means that the hospital is incurring a net operating loss of 2000.
Part # 2:
The current balance sheet of the home health firm is as follow:
Own acquisition of the home health firm by the nursing home the current assets and net fixed assets will be valued at the fair market value. The fair market value is the estimation of the market value of the assets at which the assets can be sold (Weygandt, Kieso, & Kell, 1996). In this case the fair market value of current assets is $200000 and that of net fixed assets is $300000. Hence, the nursing home will be acquiring the total assets of worth $500000. Along with this the nursing home will also be incurring the liabilities of $100000. Hence the net book value of this acquisition will be $400000. The nursing home is paying $850000 for the acquisition of home health firm, so the difference of $450000 will be recorded as the goodwill account. The goodwill is the intangible value of the company or assets because of the overall brand image and positioning of the company (Kaplan and Atkinson, 1998). Hence, this acquisition will result in changing the following accounts of nursing home:
- Decrease of 850000 in the cash
- Increase of 200000 in current assets
- Increase of 300000 in net fixed assets
- Increase of 450000 in goodwill
- Increase of 100000 in current liabilities
References
Besley, S., & Brigham, E. (2007). Essentials of Managerial Finance. USA: Thomson Higher Education.
Kaplan, R., and Atkinson, A. (1998). Advanced Management Accounting. New Jersey: Prentice-Hall.
Weygandt, J. J., Kieso, D. E., & Kell, W. G. (1996). Accounting Principles. New York: John Wiley & Sons.
