Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan: BestCare HMO Statement of Operations and Change in Net Assets Year Ended June 30, 2012 (in thousands) Revenue: Premiums earned $26,682 Coinsurance $1,689 Interest and other income $242 Total revenue $28,613 Expenses: Salaries and benefits $15,154 Medical supplies and drugs $7,507 Insurance $3,963 Provision for bad debts $19 Depreciation $367 Interest $385 Total expenses $27,395 Net income $1,218 Did BestCare spend $367,000 on new fixed assets during fiscal year 2011? If not, what is the economic rationale behind its reported depreciation expense? Explain the provision for bad debts entry. What is BestCare's total profit margin? How can it be interpreted?

Answer:

Best Care did not spend $367,000 on new fixed assets during fiscal year 2011. The economic rationale behind reporting depreciation expense is to spread the initial price of the asset over its useful life. Generally, Generally, the purpose behind this is to minimize taxable income.

Allowance for doubtful debts is created by forming a credit balance which is netted off against the total receivables appearing in the balance sheet. A corresponding debit entry is recorded to account for the expense of the potential loss. Accounting entry to record the allowance for receivable is as follows:

Debit Allowance for Doubtful Debts (Expense)

Credit   Allowance for Doubtful Debts (Balance Sheet)

Once an allowance for doubtful debts has been created, only the movement in the allowance will need to be charged to the income statement in future accounting period. So if estimated allowance for doubtful debt is same as last accounting period, no accounting entry will be required in the current period as the total receivables will be reduced by the amount of allowance which has already been created.

Best care's total profit margin = Net Income / Revenue x 100

= 1218 / 28613 x 100

= 4.26%

Total profit margin measures how much of each dollar earned by the company is translated into profits. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss.

Net profit margin provides clues to the company's pricing policies, cost structure and production efficiency. Different strategies and product mix cause the net profit margin to vary among different companies.

Net profit margin is an indicator of how efficient a company is and how well it controls its costs. The higher the margin is, the more effective the company is in converting revenue into actual profit.