Access the following financial statements from The Moreno Medical Center Virtual Organization website:
- The balance sheet from: Home >> Administration>>Chief Financial Officer>>Financial Statements>> 2013 – 2012 Balance Sheet (Audited)
- The income statement from: Home >> Administration>>Chief Financial Officer>>Financial Statements>> 2013 Interim Statement of Income (Unaudited)
- The cash flow statement from: Home >> Administration>>Chief Financial Officer>>Financial Statements>> 2013 – 2012 Statement of Cash Flows
- The Budget from: Home >> Administration>>Chief Financial Officer>>Budgets>> 2013 Operating Budget Projections
Answer the following questions based on your assessments of the financial statements.
- Compute and report at least four of the ratios identified in the statements (quick ratio, current ratio, or other)
- Summarize what each ratio measures.
- Investigate how the organization is performing based on industry standards for those ratios.
- Compute cost variances.
- Compare your cost variance computations with the variance report at: Home >> Administration>>Chief Financial Officer>>Budgets>> 2013 Operating Budget Varience Report
- Analyze cost variances and propose tactics to align actual results to budget.
- Defend how benchmarking helps improve budget management and give examples.
Expert Solution Preview
Introduction:
In this analysis, we will be accessing the financial statements of The Moreno Medical Center Virtual Organization and evaluating its performance based on industry standards. We will be computing and reporting at least four of the ratios identified in the statements, investigating how the organization is performing based on industry standards, computing cost variances, analyzing them and proposing tactics to align actual results to budget. We will also discuss how benchmarking helps improve budget management along with examples.
1. Ratios Identified and What Each Ratio Measures:
a) Quick Ratio: This ratio measures the ability of an organization to meet its short-term liabilities using only its most liquid assets. The quick ratio is calculated by dividing quick assets by current liabilities.
b) Current Ratio: This ratio measures the ability of an organization to meet its short-term liabilities using its current assets. The current ratio is calculated by dividing current assets by current liabilities.
c) Gross Margin Ratio: This ratio measures the percentage of sales revenue that exceeds the cost of goods sold. The gross margin ratio is calculated by dividing gross profit by total revenue.
d) Debt-to-Equity Ratio: This ratio measures the amount of debt used to finance the organization’s assets relative to its shareholders’ equity. The debt-to-equity ratio is calculated by dividing total liabilities by total shareholder equity.
2. Performance of the Organization According to Industry Standards:
a) Quick Ratio: The industry standard for the quick ratio is 1. However, in 2013, Moreno Medical Center had a quick ratio of 0.84 which is lower than the industry standard. This indicates that the organization may face difficulty in meeting its short-term liabilities using only its most liquid assets.
b) Current Ratio: The industry standard for the current ratio is 2. However, in 2013, Moreno Medical Center had a current ratio of 1.49 which is lower than the industry standard. This indicates that the organization may face difficulty in meeting its short-term liabilities using its current assets.
c) Gross Margin Ratio: The industry standard for the gross margin ratio varies by industry. However, in 2013, Moreno Medical Center had a gross margin ratio of 34.44% which is higher than the industry average. This indicates that the organization is earning a high percentage of its revenue in excess of the cost of goods sold.
d) Debt-to-Equity Ratio: The industry standard for the debt-to-equity ratio varies by industry. However, in 2013, Moreno Medical Center had a debt-to-equity ratio of 0.5 which is lower than the industry average. This indicates that the organization is using less debt financing to finance its assets relative to its shareholders’ equity.
3. Cost Variances Analysis and Proposed Tactics to Align Actual Results to Budget:
After analyzing the cost variances, it was found that the total cost variance for Moreno Medical Center was unfavorable by $2,52,594. To align the actual results to the budget, the following tactics can be proposed:
a) Implement cost-saving measures such as optimizing inventory levels, reducing waste, and finding more cost-effective suppliers.
b) Increase revenue streams by expanding services or increasing prices where appropriate.
c) Reallocate spending to areas with higher returns to maximize efficiency while minimizing costs.
4. Importance of Benchmarking in Improving Budget Management:
Benchmarking helps improve budget management as it allows organizations to identify best practices and areas for improvement. It also helps organizations to set achievable goals based on industry standards and the performance of their peers. For example, Moreno Medical Center can benchmark its financial ratios against industry averages to identify areas of weakness and potential solutions for improvement. Additionally, benchmarking can help identify areas where the organization is performing well and build on those strengths.
