Ratio Computation for Patton-Fuller Community Hospital Virtual Organization Team D
July 23rd, 2014
Ratio Computation for Patton-Fuller Community Hospital Virtual Organization In this paper, we will review the financial statements of the Patton-Fuller Hospital Virtual Organization. It will consist of computing eight different ratios based on unaudited financial statements, and we will then critique its operating results and financial position. The comparison of the unaudited and audited statements will be confirmed. There will be an explanation of any changes that occurred, and we will also suggest some plans that the hospital Board should make for the next year and next five years. LIQUIDITY RATIOS
1. Current Ratio
The current ratio is a measure that gives an idea of the company’s ability to pay its short-term liabilities (debt) with its short-term assets (cash, inventory, receivable). The current ratio equals current assets divided by current liabilities. For instance, the Patton Fuller Community Hospital ratio is as follow (unaudited): Current Assets
24 to 1
The unaudited financial statement current ratio shows that the hospital is able at 24 to 1 ratio to pay their obligations. Since the ratio is higher than one, it tells us that the company is in good financial health. If we compare this unaudited ratio to the audited ratio we can see a change of ratio. The audited current assets are at $127,867 and the current liabilities are at $23,807. The ratio is represented by a 5 to 1. The ratio in both situations shows an efficiency of the hospital operating cycle and its ability to turn its products into cash. There is a significant change in the ratio when comparing the financial statements. It is important to understand that a high current ratio does not always mean a good thing because it depends on how fast the company can convert into cash their current liabilities. For the future, it will be important for the Board to continue to keep such a good ratio. It is important for companies to have access to cash and investors will appreciate this ability to convert assets into cash. Since the current ratio measures only the quantity and not the quality of current assets, the Hospital must continue to invest in state of the art equipment and invest wisely to keep their assets at a good level. Since it is easy for the ratio to be manipulated, it is important to have an effective evaluation of all assets in the hospital. 2. Quick ratio
The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. In this ratio, it excludes inventories from current assets, and is calculated as follows (unaudited): Cash and cash Equivalent + Net Receivable
1.41 to 1 Current Liabilities
The quick ratio measures the dollar of liquid assets for each dollar of current liabilities. We can explain the quick ratio of 1.41 meaning that the hospital has $1.41 of liquid assets available to cover each $1.00 of current liabilities. When we compare to the audited quick ratio, we can see the difference. The hospitals cash, cash equivalent plus the net receivable are at $33,752 and the current liabilities at $23,807. The ratio became even better at 1.45 to 1. The quick ratio is more a conservative measure because it excludes inventories from current assets. There was not a significant change from the statement with the audited numbers compare to the unaudited. The Hospital must keep in mind that it may take time to convert inventories into cash, and if they need to be sold quickly, the hospital may have to accept a lower price.
3. Days Cash on Hand (DCOH)
The days cash on hand indicates the number of days of operating expenses in which a non-profit facility have available with its current...
Please join StudyMode to read the full document