Assignment 1- Brandywine Homecare
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Brandywine Homecare, a not-for-profit business, had revenues of $12 million in 2007. Expenses other than depreciation totaled 75 percent of revenues, which is $9 million, and depreciation expense was $1.5 million. Income statement is the one of the three financial statements. The other two are the balance sheet and the statement of the cash flows. Brandywine Homecares total profit margin of 12.5 percent shows that the homecare makes 12.5 cents on every dollar of total revenues. If the company doubled its depreciation, both net income and profit margin would be zero. The cash flow will be the same for both cases, which is $3 million. Cash accounting and accrual accounting are two similar methods of maintaining accurate accounting records. Accrual accounting is considered to be the standard accounting practice for most companies. Equity is the ownership claim against total assets. For investor-owned businesses, equity is the amount of owner-supplied financing. Equity for not-for-profit businesses is the amount of capital supplied by the government grants, charitable contributions or other organization.
Brandywine Homecare
Brandywine Homecare, a not-for-profit business, has reported revenues of $12 million in 2007. Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was $1.5 million. It is reported that all revenues were collected in cash during the year and all expenses other than depreciation were paid in cash.
Brandywine Homecares 2007 Income Statement
A financial statement summarizes economic events and status of an organization. Income statement is the one of the three financial statements. The other two are the balance sheet and the statement of the cash flows. An income statement is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. The literal “bottom line” of the statement usually shows the companys net earnings or losses (www.sec.gov). Also, the income statement is called the statement of operation or statement of activities.
Brandywine Homecare, a not-for-profit business, had revenues of $12 million in 2007. Expenses other than depreciation totaled 75 percent of revenues, which is $9 million ($12million multiply by 75/100), and depreciation expense was $1.5 million. Depreciation, one of the expenses categories, means a noncash change against earning on the income statement that reflects the “wear and tear” on a businesss fixed assets (Gapenski, 2008). A depreciation expense is calculated in accordance with GAAP (Generally Accepted Accounting Principles). The AICPA (American Institute of Certified Public Accountants) Council designated FASAB (Financial Accounting Standards Advisory Board) as the body that establishes GAAP for federal reporting entities. As such, the FASAB is responsible for identifying the “GAAP hierarchy” for federal reporting entities (www.fasab.gov). In the statements, the dollar amounts reported are listed in thousands of dollars. So, total revenues were $12,000, and total expenses would be $10,500 ($9,000+1,500). Brandywine Homecares net income, which is the different between total revenues and total expenses, would be $ 1,500 (12,000-10,500). Income statements of non-for-profit organizations often call the profit line revenues over expenses, expenses of revenues over expenses, change in net assets, or something else (Gapenski, 2008). According to the data provided, the income statement of Brandywine Homecare is presented bellow.
Brandywine Homecare
Income Statement
Year 2007 (in thousands)
Revenues:
Total revenues $ 12,000
Expenses:
Expenses $ 9,000
Depreciation 1,500
Total expenses $10,500
Revenue over expenses (Net Income) $ 1,500
Brandywine Homecares 2007 Net Income, Total Profit Margin, and Cash Flow
Net Income = Total revenue – Total Expenses
= $ 12,000 – $ 10,500
= $ 1,500
Brandywine Homecares revenue over expenses (net income) would be $1.5 million.
The total profit margin or just profit margin is defined as net income divided by total revenues.
Total profit Margin = Net Income / Total Revenues
= $1,500 / $12,000
= 0.125 = 12.5%
Brandywine Homecares total profit margin of 12.5 percent shows that the homecare makes 12.5 cents on every dollar of total revenues. The total margin measures the ability of the organization
to control expenses. As a rough estimate, cash flow can be defined as net income plus non-cash expenses which is the depreciation expense reported by Brandywine Homecare. Therefore, depreciation expense should be added to net income reported.
Cash Flow = Net Income + Depreciation Expense
= $ 1,500 + $ 1,500
= $ 3,000
Brandywine Homecares cash flow would be $3 million.
If Depreciation Expenses Doubled Brandywine Homecares 2007 Net Income, Total Profit
Margin and Cash Flow
If the company doubled its depreciation expense, which $3,000 (1,500+1,500), the calculations for is above will be as follows,
Net Income = Total revenue – Total Expenses