Question

Ratio analysis of two competing not-for-profit hospitals revealed the following values:

Milestone Hospital Southwest Hospital
Operating Margin 2.3% 5.4%
Current Ratio 1.50 2.20
Days Cash on Hand 128 days 112 days
Days in Receivables 72 days 58 days
Liabilities to Fund Balance 2.45 1.78

Based on these data, which of the following is an accurate conclusion?

a. Based on Liabilities to Fund Balance, Birchtree Hospital is more solvent than Southeast Hospital.
b. Based on Liabilities to Fund Balance, Southeast Hospital is more solvent than Birchtree Hospital.
c. Based on the Current Ratio, Birchtree Hospital is more solvent than Southeast Hospital.
d. Based on the Current Ratio, Southeast Hospital is more solvent than Birchtree Hospital

Answer 1

The correct option is b. Based on Liabilities to Fund Balance, Southwest Hospital is more solvent than Milestone Hospital.

Step-by-step explanation:

Note: There is a mistake in the options given in the question as the names of the hospitals in the options are different from the ones in the data provided. The correct options are therefore provided before answering the question as follows:

Based on these data, which of the following is an accurate conclusion?

a. Based on Liabilities to Fund Balance, Milestone Hospital is more solvent than Southwest Hospital.

b. Based on Liabilities to Fund Balance, Southwest Hospital is more solvent than Milestone Hospital.

c. Based on the Current Ratio, Milestone Hospital is more solvent than Southwest Hospital.

d. Based on the Current Ratio, Southwest Hospital is more solvent than Milestone Hospital

Explanation of the answer is now given as follows:

First is that a current ratio is a liquidity ratio not a solvency ratio. Therefore, options c and d are NOT correct.

Solvency ratio measures the extent which the fund balance can pay the liabilities of a not-for-profit organization.

The lower the Liabilities to Fund Balance, the more solvent a not-for-profit organization is.

Since the 1,78 Liabilities to Fund Balance of Southwest Hospital is lower than 2.45 Liabilities to Fund Balance of Milestone Hospital, it therefore implies that the correct option is b. Based on Liabilities to Fund Balance, Southwest Hospital is more solvent than Milestone Hospital.