Instructions
Columbia Needycare is a clinic in south Florida that provides basic medical care for homeless and indigent patients. The clinic is a nonprofit organization that receives revenue from however much patients can pay at the time of their visit. These revenues totaled $5 million in 2017. The clinic’s expenses, other than its depreciation, totaled 70% of its revenues. The depreciation expenses were $1 million. Other than depreciation, the clinic pays all of its expenses with cash because all of its revenues are collected in cash. Based on this information, complete the following items for Part I of the case study.
§Develop an income statement for Columbia Needy care for 2017.
§Calculate the total profit margin and net income for the clinic.
§Explain the difference between gross income and net income.
For Part II of this case study, suppose that the clinic has an opportunity to purchase an additional building in another part of the city to help more patients. The new building will cost $480,000, but it will also need $35,000 in renovations. Based on this information, answer the following questions:
§Can the clinic afford to purchase and renovate the new facility?
§Do you have enough information to make this decision? If so, how would you recommend that the clinic handle the financing for purchasing and renovating the facility? If no, what additional information would clinic managers need to make this decision?
Expert Solution Preview
Introduction:
In this case study, we are presented with the financial information of a nonprofit clinic, Columbia Needy care, that provides basic medical care for homeless and indigent patients. We are required to develop an income statement for the clinic for 2017, calculate the total profit margin and net income, and explain the difference between gross income and net income. Additionally, we are presented with an opportunity for the clinic to purchase and renovate a new facility, and we are required to determine if the clinic can afford to do so and provide recommendations for financing if necessary.
Answer:
– To develop the income statement for Columbia Needy care for 2017, we need to calculate the following:
Total Revenues = $5,000,000
Expenses (excluding Depreciation) = 70% * $5,000,000 = $3,500,000
Depreciation Expenses = $1,000,000
Net Income = Total Revenues – (Expenses + Depreciation Expenses) = $5,000,000 – ($3,500,000 + $1,000,000) = $500,000
Therefore, the income statement for Columbia Needy care for 2017 is:
Columbia Needy care Income Statement for 2017
Total Revenues: $5,000,000
Expenses: $3,500,000
Depreciation Expenses: $1,000,000
Net Income: $500,000
– The total profit margin for Columbia Needy care for 2017 is:
Total Profit Margin = Net Income/Total Revenues * 100
= $500,000/$5,000,000 * 100
= 10%
The net income for Columbia Needy care for 2017 is $500,000.
– Gross income refers to the total amount of revenue generated by a business during a specific period, while net income refers to the amount of profit a business makes after deducting all expenses, including taxes and interest, from its gross income. Net income is the amount of money that a business gets to keep after all its expenses have been paid. Gross income is important, but net income is crucial, as it indicates whether a business is profitable or not.
– Based on the information given, the clinic will need $480,000 + $35,000 = $515,000 to purchase and renovate the new facility. As we don’t have information on the clinic’s cash reserves or its ability to obtain financing, we cannot determine if the clinic can afford to purchase and renovate the new facility.
– We do not have enough information to make a recommendation for financing the purchase and renovation of the new facility. The clinic managers would need to determine the cash reserves of the clinic, its ability to obtain financing, and the impact of the purchase and renovation on the clinic’s cash flow and net income. Based on this information, the clinic should consider financing options such as taking out a loan, seeking grants, or partnering with other organizations to cover the costs of the purchase and renovation.
