Which of the following statements is CORRECT? If a bank loan officer saw that a

Question

Which of the following statements is CORRECT?

If a bank loan officer saw that a firm’s days in patient accounts receivable (ACP) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.

If a firm increases its patient service revenues while holding its accounts receivable constant, then, other things held constant, its days in patient accounts receivable (ACP) will increase.

There is no relationship between the days in patient accounts receivable (ACP) and the days cash on hand. These ratios are totally independent of each other.

A reduction in accounts receivable (due to collection) would have an adverse effect on the current ratio, but it would lead to a decrease in the cash ratio.

If a firm increases its patient service revenues while holding its accounts receivable constant, then, other things held constant, its days in patient accounts receivable (ACP) will decline.

Explanation / Answer

1)

If the patient accounts receivable was higher than industry average it means that the firm's conversion from receivable to cash takes longer time which is not a sign of good strength. This will lead to cash crunch and liquidity crisis if allowed to go out of control

2)

Days in Patient Account receivable= 365* Account receivable/Revenues

As Days in Patient Account receivable is inversely proportional to revenues, any increase in revenues will cut short ACP . So Days in account receivable will decrease on increasing revenues and other things held constant.

3)

Days Cash on Hand = Days Patient Account receivable - Days Account payable

As such,the quicker days in account receivable ,the better the days cash on hand and vice versa. Hence there is a direct relationship between Days cash on hand and days patient account receivable

4)

A reduction in account receivable will decrease the account receivable and increase the cash in the balance sheet of the firm. As such Current ratio will have no effect as there is not net change in assets. However, it will increase the cash ratio as Cash ratio = Cash+Cash Equivalents/Current Liabilities.

5)

As seen from the first answer,

ACP = Receivables/Revenues * 365 , if a firm increases its patient services revenue while keeping other things constant it will decrease the ACP as ACP is inverselt proportional to Revenues.

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