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...
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…
