Financial Statement Analysis: Average Payment Period Ratio

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Assignment 2: Required Assignment 1—Financial Statement Analysis: Average Payment Period Ratio

In this assignment, you will compare year-over-year payment trends using the average payment period ratio, which is calculated as follows:

Average Payment Period Ratio = Current Liabilities / ([Total Operating Expenses – Depreciation and Amortization Expenses] / 365)

The average payment period measures how long it takes, on average, for a business to pay back its creditors or, in essence, to pay its bills.

Review the following scenario:

You are the department head for the finance department for Anytown Hospital, a not-for-profit community hospital in an urban community. The hospital administrator reviewed the most recent average payment period report (for fiscal year 2012 [FY2012]) and noted a variance between the FY2011 and FY2012 reports. The hospital administrator is not well versed in financial reports.
As the chief finance officer (CFO) and financial expert, you are tasked to explain the variance to the Administrator. You must answer whether the variance is positive or negative as compared with the industry benchmark of 45 days. What are the risks if the trend is negative between FY2011 and FY2012? What are the benefits if the trend is positive from FY2011 to FY2012? You will present your findings in a PowerPoint presentation to the Hospital Administrator and other hospital department heads.

Based on your analysis of the scenario, complete the following tasks:

Part 1: Average Payment Period Ratio Report Development

For this assignment, you will develop and analyze financial statements. Part 1 of the assignment includes describing what an average payment period is and how it is calculated. Use the years and the dollar amounts provided in the table below:

Operating Expenses Depreciation and Amortization Difference Days per Year Average Cash Expense per Day
15,255,263.00 553,219.00 365
12,589,823.00 665,393.00 365
Year Current Liabilities Average Cash Expense Per Day Average Payment Period Days
2011 2,550,263.00
2012 4,553,681.00

Using an Excel spreadsheet (or any other tool for performing calculations), determine the average payment period for FY2011 and FY2012. Use the following steps:

  • Use the provided dollar amount of total operating expenses and depreciation and amortization.
  • Subtract depreciation and amortization from the operating expenses and divide by 365 days to compute the average cash expense per day.
  • Identify the dollar amounts for current liabilities on the balance sheet.
  • Divide the current liabilities by the average cash per day.
  • Determine if the trend is positive or negative for the average payment period days.
  • Determine if the 2011 and 2012 average payment period days are above or below the industry benchmark.

Part 2: Risks and Benefits Analysis
Based on your calculations in Part 1, address the following:

  • Identify at least two risks if the trend is negative or two benefits if it is positive. What is the potential impact on the hospital? Support your assertions with authoritative references.
  • Discuss possible contributing factors to the positive or negative trend and any strategies the hospital could use to ensure the currently established industry benchmark is met.

Develop an 8–10-slide PowerPoint presentation (excluding the title and reference slides).
Include the completed average payment period ratio table in your presentation. Include detailed speaker notes with APA format, including references. Use a properly formatted APA 6th edition figure caption for the table or any other figures or charts. Use at least 5–7 scholarly sources in your research.
Write your document in a clear, concise, and organized manner; demonstrate ethical scholarship in accurate representation and attribution of sources; and display accurate spelling, grammar, punctuation, and references page. Apply APA standards to citation of sources.

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