HCS/380 Wk 4: sample paper, in real form

Reading a Community Hospital's Statements: Ratio Analysis and a 1.9 Million Dollar Imaging Replacement Decision at Cedar Ridge Community Hospital

[Author Name]

College of Health Professions, University of Phoenix

HCS/380 Health Care Accounting

Wk 4 Assignment

[Faculty Name]

August 11, 2026

Cedar Ridge Community Hospital is a composite organization written as a model document. No real hospital, employer or set of audited statements is described.

The Organization and Its Statements

Cedar Ridge Community Hospital is a composite nonprofit hospital of 96 licensed beds serving a single county of about 140,000 residents. In the fiscal year ended December 31, 2025 it recorded 4,860 inpatient discharges, 38,400 emergency department visits and 112,000 outpatient visits. Its payer mix by gross charges was Medicare 44 percent, Medicaid 17 percent, commercial 33 percent and self-pay or other 6 percent. All dollar figures below are stated in thousands unless the word million appears. The statement of operations for the year reported net patient service revenue of 118,400 and other operating revenue of 3,600, for total operating revenue of 122,000. Total operating expenses were 118,700, leaving operating income of 3,300. That surplus, not any single ratio, is the number every later calculation has to respect.

Inside those expenses, salaries and benefits of 68,900 are the largest line at 56.5 percent of total operating revenue, followed by supplies at 21,300 or 17.5 percent, purchased services at 12,700, depreciation and amortization at 7,400, other operating expenses at 6,860 and interest at 1,540. On the balance sheet, current assets total 24,500: cash and cash equivalents of 6,120, net patient accounts receivable of 14,850, supplies inventory of 2,430 and prepaid expenses of 1,100. Net property, plant and equipment stands at 61,200 and other long-term assets at 8,300, for total assets of 94,000. Current liabilities total 15,500, made up of accounts payable of 7,450, accrued salaries and benefits of 5,900 and the current portion of long-term debt of 2,150. Long-term debt net of that current portion is 28,600, total liabilities are 44,100 and net assets are 49,900.

Two plain readings come out of the statements before a single ratio is calculated. The first is that the hospital earned 3,300 on 122,000 of revenue, which means every operating decision this year has to clear a very narrow gap. The second is that depreciation of 7,400 is more than twice the operating surplus, so the physical plant is consuming value faster than operations replace it. Both readings matter because management has one open capital request: the computed tomography scanner installed eleven years ago is at the end of its service contract, and replacement is quoted at 1.9 million dollars. The sections that follow measure the hospital first and then price that request in the measures.

Ratio Analysis

Liquidity comes first because it sets the limits on everything else. The current ratio is current assets divided by current liabilities, or 24,500 divided by 15,500, which equals 1.58. Cedar Ridge holds 1.58 dollars of assets convertible within a year for every dollar coming due in that year. That reading flatters the position, because 14,850 of the 24,500 is money billed but not yet collected. Days cash on hand corrects for that. It divides unrestricted cash by average daily cash operating expense, which is total operating expenses less depreciation, so 6,120 divided by (118,700 minus 7,400, divided by 365), or 6,120 divided by 304.9, which equals 20.1 days. Twenty days is the real cushion (Cleverley et al., 2018).

Days in accounts receivable divides net patient receivables by average daily net patient service revenue: 14,850 divided by (118,400 divided by 365), or 14,850 divided by 324.4, which equals 45.8 days. Because that denominator is a daily figure, it also prices a day of delay: each day of receivables ties up about 324 thousand dollars of cash, which makes receivables a standard measure to watch (Healthcare Financial Management Association, 2023). Capital structure is measured by debt to capitalization, long-term debt divided by long-term debt plus net assets, or 28,600 divided by 78,500, which equals 36.4 percent. Total asset turnover, total operating revenue divided by total assets, is 122,000 divided by 94,000, or 1.30 dollars of revenue produced per dollar of assets held (Gapenski & Reiter, 2016).

Profitability closes the set. Operating margin is operating income divided by total operating revenue, 3,300 divided by 122,000, or 2.7 percent. Return on net assets is operating income divided by net assets, 3,300 divided by 49,900, or 6.6 percent. Read together with the liquidity figures, those margins describe a hospital with almost no absorption capacity: one percentage point of operating margin is 1,220 thousand dollars, so a single bad quarter in labor or supply cost erases the year. That fragility is not unique to this composite, since national reporting has described persistent expense pressure across community hospitals and Medicare payment below cost in aggregate (American Hospital Association, 2024; Medicare Payment Advisory Commission, 2024).

The Capital Decision, Priced in the Same Ratios

The replacement scanner is quoted at 1.9 million dollars with a seven-year expected service life, which produces straight-line depreciation of 271 thousand dollars a year. Under a cash purchase, cash falls from 6,120 to 4,220. Days cash on hand then falls from 20.1 to 13.8, because 4,220 divided by 304.9 equals 13.8, and the current ratio falls from 1.58 to 1.46, since 22,600 divided by 15,500 equals 1.46. The income statement effect in year one is only the new depreciation, so operating income moves from 3,300 to 3,029 and operating margin from 2.7 percent to 2.5 percent. A cash purchase therefore looks cheap on the statement of operations and expensive on the balance sheet.

Under the second option, a five-year loan of 1.9 million dollars at 6.0 percent, the level annual payment is about 451 thousand dollars. Year one carries depreciation of 271 and interest of 114, a combined 385 against operations, so operating income becomes 2,915 and operating margin 2.4 percent. Long-term debt rises from 28,600 to 30,500 and debt to capitalization rises from 36.4 percent to 37.9 percent, because 30,500 divided by 80,400 equals 37.9 percent. Days cash on hand stays at 20.1. Stated plainly, financing costs about a tenth of a percentage point of margin in year one and 1.5 percentage points of leverage, and it protects 6.3 days of cash that the purchase option would spend.

The recommendation is to finance the scanner and to attach a receivables target to the approval. Cash is the scarcer resource here: a hospital carrying twenty days of it should not spend a third of that cushion on equipment while a cheaper source of cash sits inside its own revenue cycle. At 324 thousand dollars per day of receivables, moving collections from 45.8 days to 40.8 days releases about 1.62 million dollars, which is close to the purchase price and adds neither debt nor interest. The recommendation reverses only under a stated condition: if a bond covenant capped debt to capitalization below 38 percent, the loan would breach it, and the decision would return to cash with the receivables work done first.

References

American Hospital Association. (2024). Costs of caring. https://www.aha.org/costsofcaring

Cleverley, W. O., Cleverley, J. O., & Song, P. H. (2018). Essentials of health care finance (8th ed.). Jones & Bartlett Learning.

Gapenski, L. C., & Reiter, K. L. (2016). Healthcare finance: An introduction to accounting and financial management (6th ed.). Health Administration Press.

Healthcare Financial Management Association. (2023). MAP keys: Industry-standard revenue cycle metrics. https://www.hfma.org

Medicare Payment Advisory Commission. (2024). Report to the Congress: Medicare payment policy. https://www.medpac.gov