Use Additional Information from $10-$K to Explain Linkages Among Financial Statements

Community Health Systems operates general acute care hospitals in communities across the United States. The company reports the following information in Schedule II of its $201710$K$.$

SCHEDULE II$$VALUATION AND QUALIFYING ACCOUNTS

Balance at Acquisitions Bad Balance

Beginning and Debt Write$-$ at End

$ millions of Year Dispositions Expense Offs of Year

December $31,2017,$ allowance for doubtful accounts $$4,150$ $$(23)$ $$3,359$ $$(3,230)$ $$4,256$

December $31,2016,$ allowance for doubtful accounts $4,521(402)3,134(3,103)4,150$

December $31,2015,$ allowance for doubtful accounts $3,854(19)3,485(2,800)4,520$

Accounts receivable represents the amount customers owe Community Health Systems for services rendered. The balance in the allowance for doubtful accounts is the company$$s best estimate of the amount that customers will not repay. Community Health Systems' balance sheet and income statement reported the following.

$ millions $201720162015$

Revenue $$18,398$ $$21,275$ $$22,564$

Operating income $($loss$)$ before tax $(2,066)(946)1,471$

Total assets $17,45021,94426,861$

a$.$

$1.$ Compute the common$$size allowance for doubtful accounts for each year.

Note: Round percentage to one decimal point $($for example, round $18\mathrm{.}566\%$ to $18\mathrm{.}6\%).$

$201720162015$

Common size allowance Answer

$0$

Answer

$0$

Answer

$0$

$2.$ What conclusion may be drawn by analysts in comparing the common$-$size allowance in $2017$ to the previous years?

Answer

b$.$ On average, the firms in the S&P $500$ report common$$size allowance for doubtful accounts between $3\%$ and $5\%.$ Why might Community Health Systems$$ ratio be so much higher?

Community Health Systems now has: Answer

c$.$

$1.$ Compute the common$$size bad debt expense for each year.

Note: Round percentage to one decimal point $($for example, round $18\mathrm{.}566\%$ to $18\mathrm{.}6\%).$

$201720162015$

Common size allowance Answer

$0$

Answer

$0$

Answer

$0$

$2.$ What trend is implied by the common$-$size analysis of bad debt expense?

Community Health Systems has: Answer

d$.$ If the company had recorded bad debt expense of $$2,809$ in $2017($which is $$550$ less than actually recorded$),$ which of the following would be true? $($Ignore taxes for this question.$)$

$1.$ Answer

The company would have reported operating loss of $$1,516$ and cash flow would have been $$550$ higher.

$2.$ Answer

The company would have reported operating loss of $$2,616$ and cash flow would have been $$550$ higher.

$3.$ Answer

The company would have reported operating loss of $$1,516$ and cash flow would have been unchanged.

$4.$ Answer

The company would have reported operating loss of $$2,066$ and cash flow would have been unchanged.