Accounting Assignment Questions

Accounting Assignment Questions

Important: You must show all calculations and explain how you got all your answers. For example, suppose a question asks what the profit will be in a particular month and you put "\$50,000". Even if this is correct you will receive no marks if you do not show how you got the answer.

There is no need for footnotes or references. But it is essential that the work is your own.

Question 1 (5 Marks)

Suppose you are asked to do a cash flow budget for the next 12 months for a newly opened baby health clinic. The budget must be done on a month-by-month basis. As the clinic has just opened you have no historical accounting data. The clinic is allowed to treat both private (fee paying) and public (no fee charged) patients. Outline the steps you would take, the type of questions you would need to ask and any assumptions you would need to make to develop the budget. Highlight the main areas of concern you would have about the accuracy of your forecasts – for example would you be more confident about your revenue or expense forecasts?

Question 2 (10 marks)

The Adelaide Private Hospital has estimated the following patient revenue and purchases for the next three months:

 Month Patient revenue Purchases July \$120,000 \$50,000 August \$150,000 \$40,000 September \$110,000 \$30,000

Past experience indicates that the hospital will collect 20% of the patient revenue in the month of the service, 50% of the uncollected amount in the month after the service and the balance in the second month after the service.

The Hospital pays for half its purchases in the month of the purchase and the other half in the following month.

Labour costs are 5% of that month’s estimated patient revenues and are paid in cash in that month.

Depreciation expense is \$8,000 per month. Miscellaneous cash expenses are \$6,000 per month and are paid in the month in which they are incurred. General and administration expenses of \$50,000 are paid in cash each month.

A \$80,000 piece of equipment is to be purchased in August and is to be depreciated on a straight-line basis over 10 years with no expected salvage value. It will be paid in cash in full in August.

The Hospital also intends to pay a cash dividend of \$9,000 to shareholders in July. The Board of the Hospital is very conservative and believes that it should start each month with a minimum cash balance of \$30,000.

Cash on hand on 30 June was \$30,000. Patient revenue for May and June was \$100,000 in each month and purchases were \$60,000 for both May and June.

1. Prepare a cash budget for July and August.
2. Would the Hospital need to borrow money in either of these months – i.e. July and August - to satisfy the requirement of having \$30,000 at the beginning of the month? How much would it need to borrow?
3. Would you advise the Board to delay the purchase of the \$80,000 piece of equipment in August? Give reasons for your advice.

Question 3 (5 Marks)

The Struggling Hospital has been advised by its doctors to establish an open heart surgery department. But the accountant is not convinced that this would be financially viable. Under the DRG system, the hospital expects to receive \$28,000 per open heart surgery for each of the forecast 100 open heart surgeries per year. The extra costs associated with opening the open heart surgery department are expected to be \$30,000 per patient, so a loss would be incurred.

However, the prestige associated with offering open heart surgery would attract new doctors who would also bring with them additional patients. It is expected that 10 new doctors would be attracted to the hospital and they each would generate 20 additional patients per year across a wide variety of DRGs. Struggling has excess capacity and would welcome additional patients.

It is expected that the average DRG reimbursement for these new patients would be \$14,000. The average total cost is expected to be \$13,900 for each of these patients and the average marginal cost for each patient is expected to be \$13,200.

Explain the difference between average cost and marginal cost.

How many non-open heart surgery patients would Struggling need to treat to offset the loss in the open heart surgery department?

Question 4 (10 marks)

A radiology laboratory in a not-for-profit organisation is considering upgrading its equipment to provide faster, more reliable images. The existing equipment was purchased five years ago for \$1.15 million and is being depreciated on a straight-line basis over a ten year life and it is expected to have a salvage value at the end of 10 years of \$150,000. The old equipment can be sold now for \$650,000.

The new equipment will cost \$1.5 million and is estimated to have a five year life. It would be depreciated on a straight-line basis and has an estimated salvage value at the end of five year of \$750,000. If the organisation bought the new equipment it would sell the old equipment for \$650,000.

Presently, 45 patients per day, 260 days per year, can be screened using the old equipment with an average patient fee of \$75. The average patient fee is expected to increase by 10% per annum over the next five years.

The new equipment can process 60 patients per day. The old equipment costs \$60,000 per year in maintenance compared with \$30,000 for the new equipment and these costs are paid in cash. This organisation is able to borrow at 9%.

Should the organisation buy the new equipment or keep on with the old equipment? Apart from financial considerations are there any other factors that would influence your decision?

Question 5 (15 marks)

The following table gives the operating budget for a department in a hospital.

 Budget Actual Variance Number of patients 10,000 9,560 Patient fees 1,750,000 1,242,800 Variable Expenses Salary and wages 758,662 872,222 Administration 4,500 1,700 Repairs and maintenance 5,600 8,300 Food 14,000 13,000 Drugs 36,000 49,500 Electricity 5,000 6,500 Clinical supplies 18,500 18,700 Telephone 4,800 4,850 Miscellaneous expenses 3,500 5,000 Total variable expenses 850,562 979,772 Fixed expenses Insurance 5,500 7,800 Rent 10,500 11,700 Council rates 6,500 6,500 Depreciation expenses 18,000 18,000 Office overheads 35,000 35,000 Total fixed expenses 75,500 79,000 Total expenses 926,062 1,058,772 Net income 823,938 184,028

1. You are asked to prepare a budget variance report – remember that you must compare like with like.

2. From your variance report what variances do you consider significant? Why?

3. Suggest some reasons why these variances may have occurred. For example, how can there be a variance in some fixed costs when fixed costs are not supposed to change with patient numbers?

4. What corrective action would you suggest?