Brandywine Homecare Construct Brandywine\'s 2007 Income Statement.

Brandywine Homecare

Construct Brandywine's 2007 income statement.

Revenues

$12,000,000

Expenses

(75% of Revenue)

$9,000,000

Depreciation Expense

$1,500,000

Net Income

$1,500,000

What were Brandywine's 2007 net income, total profit margin, and cash flow?

Brandywine's Net Income =

$1,500,000

Brandywine's Total Profit Margin

Total Profit Margin =

Net Income/Revenue = $1,500,000/$12,000,000 = 0.125

Brandywine's Cash Flow

Net Income =

$1,500,000

Non-Cash Expense (Depreciation)

$1,500,000

Cash Flow for the FY ended 2007

$3,000,000

In this case, a total profit margin of 0.125 means that for every $1 of income Brandywine rakes in, it earns a net income of $0.125.

Question 3

Suppose the company changed its depreciation calculation procedures (still within

GAAP) such that its depreciation expense doubled. How would this change affect

Brandywine's net income, total profit margin, and cash flow?

With the depreciation expense increased twofold, the firm would have a nil value for net income.

Revenues

$12,000,000

Expenses

(75% of Revenue)

$9,000,000

Depreciation Expense (Doubled)

$3,000,000

Net Income

With the depreciation expense increased twofold, the firm would have no profit margin.

Brandywine's Total Profit Margin

Total Profit Margin =

Net Income/Revenue = 0/12,000,000 = 0

With the depreciation expense doubled, Brandywine would have a higher value/figure of cash flow. Cash flows in this case would be captured as $4,500,000, up from $3,000,000.

Brandywine's Cash Flow

Net Income =

$1,500,000

Add: Non-Cash Expense (Depreciation Doubled)

$3,000,000

Cash Flow for the FY ended 2007

$4,500,000

Question 4

Explain the difference between cash and accrual accounting. Be sure to include a discussion of the revenue recognition and matching principles.

According Rich, Mowen, Hansen & Jones (2009), "under cash-basis accounting, revenue is recorded when cash is received, regardless of when it is actually earned." The authors further note that under cash accounting, the recording of an expense takes place when the cash payment occurs regardless of when the said expense was incurred or took place. In that regard, it can be noted that in cash accounting, expense and revenue recognition is tied to cash exchange as opposed to the actual business activity. It is also important to note that in the case of cash accounting, all the liabilities as well as assets of a firm may not be captured or reflected at a given or specific date. This is largely because in this case, only the cash transactions' cash effect is recorded. This remains one of the main reasons why most firms shun cash accounting.

On the other hand, Rich, Mowen, Hansen & Jones (2009) note that "under accrual accounting, transactions are recorded when they occur." It can be noted the accrual accounting differs from cash accounting largely because income measurement is tied to selling. For most companies, this method is seen as being superior to cash accounting as selling remains one of the main activities of an entity. As Duchac, Reeve & Warren (2006) note, misleading results brought about by the timing of cash payments and receipts can be avoided by the use of accrual accounting as opposed to cash accounting. In accrual accounting, unlike in cash accounting, the recognition of revenue takes place when the same is earned. This is regardless of whether or not "actual cash flows take place" (Norton, Diamond and Pagach, 2006). Similarly, expenses are recognized on being incurred. Further, as per the marching principle, the recognition of expenses takes place in the same period in which the recognition of related revenue takes place. By virtue of recording both non-cash and cash transactions, this system is also considered more complex than cash accounting (Rich, Mowen, Lansen & Jones, 2009).

Question 5

Explain the difference between equity section of a not-for-profit business and an investor-owned business

To highlight these differences, it may be prudent to contrast the equity section of both entities. To begin with, when it comes to assets in the equity equation, not-for-profit enterprises primarily report only the funds raised. However, in the case of an investor owned business, assets could include security deposits, investments etc.

Further, regarding the types of equity, an investor-owned business typically lists the sources of equity as being proceeds from sales of new stock as well as retained earnings. In the case of a not-for-profit, it is important to note that earnings can be retained in this case but it may be impossible to raise funds through the sale of common stock. With that in mind, stock sales are not captured in this case. Funds in a not-for-profit are mainly raised by way of donations as well as grants designed to aid various causes including but not limited to betterment of education as well as health care.