What is Gross Income?

Gross income is the total amount of revenue an entity receives before subtracting the total number of expenses incurred in a particular accounting period (Kutzin, Yip & Cashin, 2016). Net income on the other hand is the total amount of revenue that an entity is left with after subtracting the expenses from the gross revenue gained in a particular accounting period (Gapenski & Reiter, 2016). The two concepts might be confusing but primarily, one is a factor of the other. Without gross income, it is impossible to have net income. From the case, gross income can be quantified as the total $5,000,000 the firm has earned in the form of revenue. Net income from the case is the $500,000 the firm is left with as revenue after deducting the expenses and depreciation. 

The clinic can afford to purchase and renovate the new facility. In as much as the clinic’s net income is $500,000 the clinic still has cash flow that is required for the purchase of the new facility. The reason the clinic can afford the new facility is because depreciation as an expense does not have an effect on the firm’s cash flow. Depreciation is an accounting concept that entails the reduction from the gross income gotten in the accounting period the depreciation incurred on equipment and buildings in that particular period (Gapenski & Reiter, 2016). The depreciation is usually calculated mathematically using accounting formulas. The firm’s available cash balance is, therefore, more than the $500,000 indicated in the income statement. If the $500,000 is added the total of $1,000,000 accounted for in the statement as depreciation, the total cash available to the firm is $1,500,000, which is enough to offset the $480,000 for purchase of the building and the $35,000 for its renovation. 

I do not have enough information to make this decision. In as much as I am aware of the financial position that the firm is in, I am still unaware of so many other factors that would be necessary for such a purchase. One such factor is the location of the building. I will have to get information concerning the new building’s potential of being an irreplaceable asset for the firm by being located in a prime and accessible environment for the clinic’s customer. Other than that, I also do not have information relating to the physical condition of the building. Buildings depreciate steadily over a period of time. It is always vital for managers to be aware of a building’s exact physical state before making any purchase (Kutzin, Yip & Cashin 2016). Purchases in the form of buildings and other similar capital items always require the conduct of enough feasibility study to establish the potential economic return that investing in such a venture may have for the business. 

Should the company, however, choose to go ahead with the purchase of the building; there are several financing options that are available. One financing option available to the firm is the use of loan financing (Kutzin, Yip & Cashin 2016). The institution can access loan financing from financial lenders such as banks. Debt financing is a suitable source of finance since it can help an institution to get large sums of capital (Kutzin, Yip & Cashin, 2016). The clinic can also make use of internal sources of capital. Through the firm’s own internal capital reserves, the clinic can manage to finance the purchase of the building. Internal financing is the best source of financing for the firm since it is less risky (Gapenski & Reiter, 2016). Through the use of internal sources of finance, managers get access to a financing option that can be used for a long period of time. Internal capital doesn’t involve timelines for repayment like other sources of financing such as debt financing. 

References 

Gapenski, L.C. & Reiter (2016). An introduction to accounting and financial management. (6thed.) Chicago IL http://gen.lib.rus.ec/book/index.php?md5=5C2C6EC8BD87FFA74B646FBD2AED849D 

Kutzin, J., Yip, W., & Cashin, C. (2016). Alternative financing strategies for universal health coverage. In  World Scientific Handbook of Global Health Economics and Public Policy: Volume 1: The Economics of Health and Health Systems  (pp. 267-309).