San Mateo Healthcare had an equity balance of $1.38 million at the beginning of
ID: 2612477 • Letter: S
Question
San Mateo Healthcare had an equity balance of $1.38 million at the beginning of the year. At the end of the year, its equity balance was $1.98 million.
a) Assume that San Mateo is a not-for-profit organization. What was its net income for the period?
b) Now, assume that San Mateo is an investor-owned business:
Assuming zero dividends, what was San Mateo’s net income?
Assuming $200,000 in dividends, what was its net income?
Assuming $200,000 in dividends and $300,000 in additional sales, what was San Mateo’s net income?
Explanation / Answer
Part a)
Since, San Mateo Healthcare is a non-profit organization, the difference between the equity balances (beginning and opening) would be considered as the net income. The formula for calculating net income would be:
Net Income = Closing Balance - Equity Balance
___________
Using the information provided in the question, we get,
Net Income = 1.98*1,000,000-1.38*1,000,000 = $600,000
___________
Part b)
Since, San Mateo is an investor business, its equity in the end will be calculated with the use of following formula:
Ending Equity = Beginning Equity + Net Income - Dividends
With the use of this equation, we can derive the formula for Net Income which is given below:
Net Income = Ending Equity + Dividends - Beginning Equity
___________
1) Assuming zero dividends, what was San Mateo’s net income?
Net Income = 1.98*1,000,000 + 0 - 1.38*1,000,000 = $600,000
___________
2) Assuming $200,000 in dividends, what was its net income?
Net Income = 1.98*1,000,000 + 200000 - 1.38*1,000,000 = $800,000
___________
3) Assuming $200,000 in dividends and $300,000 in additional sales, what was San Mateo’s net income?
An increase in sales will result in an increase in net income in the same proportion assuming other things remain constant. The formula would be:
Net Income = Ending Equity + Dividends - Beginning Equity + Additional Sales
___________
Net Income = 1.98*1,000,000 + 200,000 - 1.38*1,000,000 + 300,000 = $1,100,000
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