DB 2 Summer

Chapter 9

Financial

Statements

Learning Objectives

• Understand the four financial statements.

1. Balance sheet

2. Statement of operations

3. Statement of changes in net assets

4. Statement of cash flows

 Footnotes

Understanding Financial Statements

• Balance sheet

– Presents a record of an organization’s assets,

liabilities, and net assets (equity) at a specific

point of time. In essence, it is a financial snapshot

of the organization at a certain date.

• Statement of Operations (Income Statement

or Statement of Revenues and Expenses)

– Details the organization’s revenues and expenses

during the accounting period, typically one year.

• Statement of Changes in Net Assets

– Lists how net assets (equity) changed during the

period

• Statement of Cash Flows

– Describes how cash was generated and used

• Notes to the Financial Statements (Footnotes)

– Provide detail on the organization’s structure,

accounting practices, and financial standing. Not

considered to be part of the four primary financial

statements.

Understanding Financial Statements,

cont.

• Balance sheet

A. Current assets

1. Cash

2. Cash equivalents

3. Accounts receivable

4. Inventory/supplies

5. Prepaid expenses

6. Limited-use current assets

7. Other current assets

B. Assets whose use is limited

1. By board for capital

2. Malpractice funds

3. Bond trustee

Understanding Financial Statements,

cont.

Current Assets:

Assets that are expected to be exchanged for

cash or consumed during the operating cycle

of the entity (or one year, whichever is longer)

Accounts Receivable:

Represent legally enforceable claims on

customers for prior services or goods.

Cash & Cash Equivalents:

Cash consists of coin, currency, and available

deposited funds at banks. Cash equivalents

include savings accounts, certificates of

deposit, and other temporary marketable

securities.

Assets Whose Use is Limited:

Typically, cash and investments that can only

be spent for specific purposes

C. Property and equipment

1. Land and improvements

2. Buildings and equipment

3. Construction in progress

4. Allowance for depreciation

D. Other assets

1. Investments in affiliated companies

2. Goodwill

3. Debt issuance costs

Allowance for (Accumulated) Depreciation:

Accumulated depreciation taken on the asset

to the date of the financial statement – this is

different than “depreciation expense” on the

Income Statement.

Goodwill:

The difference between the price paid to

acquire another entity and the fair market

value of the acquired entity’s assets, less any

related obligations or liabilities

Property and Equipment:

Investment in tangible, permanent assets;

sometimes referred to as the capital assets

(or net fixed assets) of the organization.

Understanding Financial Statements,

cont.

E. Current liabilities

1. Current installments of LTD

2. Accounts payable

3. Accrued expenses

4. Construction payable

5. Estimated third-party settlements

6. Deferred revenue

F. Noncurrent liabilities

1. Long-term debt

2. Deferred revenue

3. Estimated malpractice costs

G. Net assets

Long-term Debt:

Represents the amount of long-term

indebtedness that is not due in the next year

Net Assets (Equity):

The difference between assets and the claim

to those assets by third parties or liabilities

Current Liabilities:

Obligations that are expected to require

payment in cash during the coming year or

operating cycle, whichever is longer

Current Installments (Portion) of LTD:

Represents the amount of principal that will

be repaid on the indebtedness within the

coming year

Understanding Financial Statements,

cont.

Balance Sheet Example: Harris Memorial Hospital & Harris Community Foundation

December 31,

20X7

December 31,

20X6

Assets

Current assets:

Cash and cash equivalents $ 82,815 $ 59,696

Assets limited as to use, current portion 5,327 5,088

Accounts receivable:

Patients, less allowance for doubtful accounts

($25,302 in 20X7 and $23,014 in 20X6) 70,025 59,939

Other 28,990 24,995

Supplies 7,078 6,663

Total current assets 194,235 156,381

Assets limited as to use:

For donor-restricted purposes 84,440 67,826

Board designated for specific purposes 382,835 378,413

Held by trustees under bond agreements 51,038 25,937

518,313 472,176

Less current portion 5,327 5,088

512,986 467,088

Property and equipment, net 563,349 458,829

Other assets 34,476 34,302

Total assets $ 1,305,046 $ 1,116,600

Discussion: What are doubtful

accounts?

Discussion: How do we identify

unrestricted cash and

investments?

Discussion: How do we identify

accumulated

depreciation?

Understanding Financial Statements,

cont.

Balance Sheet Example: Harris Memorial Hospital & Harris Community Foundation

Discussion: Where can additional

information regarding

long-term liabilities be

found?

December 31,

20X7

December 31,

20X6

Liabilities and net assets

Current liabilities:

Accounts payable $32,572 $24,631

Accrued expenses and other liabilities 58,878 53,725

Due to third-party payors 7,380 12,633

Current maturities of long-term debt 4,692 5,908

Total current liabilities 103,522 96,897

Long-term debt, less current maturities 439,597 332,354

Contingent professional liabilities 33,260 48,487

Due to broker 15,128 19,608

Other liabilities 20,713 5,298

Postretirement benefit obligation, other than pensions 8,207 7,694

Total liabilities 620,427 510,338

Net assets:

Unrestricted 600,179 538,436

Temporarily restricted 55,213 40,393

Permanently restricted 29,227 27,433

Total net assets 684,619 606,262

Total liabilities and net assets $1,305,046 $1,116,600

Understanding Financial Statements,

cont.

• Statement of operations

A. Total revenue

1. Net patient service revenue

2. Other revenue

B. Expenses

1. Wages & benefits

2. Supplies

3. Depreciation

4. Interest

5. Bad debts

6. Other

C. Other income sources

Depreciation:

A noncash expense that represents the

financial value an asset loses over some

period of time (usually defined by the asset’s

useful life)

Net patient service revenue:

The revenue from patients after deductions

from gross price (charges)

Bad Debts:

The amount of charges that will not be

collected from patients from whom payment

was expected

Interest:

Expense paid as part of debt financing

Other income:

Examples include income on endowments,

tax support, income on reserves, and gains

and losses from sales of properties

Understanding Financial Statements,

cont.

Statement of Operations Example: Harris Memorial Hospital & Harris Community Foundation

Discussion: What is the difference

between doubtful

accounts in A/R in the

balance sheet and bad

debt expense?

Discussion: Is net patient revenue

the full charge

amount to patients?

December 31,

20X7

December 31,

20X6

Unrestricted revenues and other support:

Net patient service revenue $829,005 $774,662

Other operating revenue 27,055 29,334

Total operating revenue 856,060 803,996

Operating expenses:

Salaries and wages $ 371,449 $ 329,668

Employee benefits 81,532 77,231

Supplies and purchased services 228,244 225,497

Advertising 3,072 2,376

Staff enrichment 10,767 8,591

Occupancy cost 14,346 13,442

Depreciation 44,392 41,627

Interest 10,974 6,145

Provision for bad debts 55,851 57,975

Operating expenses 820,627 762,552

Excess of revenue over expenses 35,433 41,444

Continued on next slide…

Understanding Financial Statements,

cont.

Statement of Operations Example: Harris Memorial Hospital & Harris Community Foundation

Discussion: If I need to use “net

income” for a

financial ratio, which

line should I use?

December

31, 20X7

December

31, 20X6

Continued from previous slide…

Excess of revenue over expenses 35,433 41,444

Nonoperating gains (losses):

Contributions, gifts, and bequests 3,189 1,318

Net assets released from restrictions

for research expenditures 14,070 14,474

Research, education, and other

nonopearting expenses (22,980) (24,773)

Change in interest rate swap value

and put agreements 1,578 9,397

Investment income 30,453 18,402

26,310 18,818

Excess of revenues and gains over

expenses and losses $61,743 $60,262

Understanding Financial Statements,

cont.

• Statement of Changes in Net Assets

A. Basic Equation

= + Income + Ending

Balance

Beginning

Balance Transfers

In

Transfers

Out –

Understanding Financial Statements,

cont.

Statement of Changes in Net Assets Example: Harris Memorial Hospital & Harris Community Foundation

Discussion: What led to the

organization’s largest

changes in net

assets?

December 31,

20X7

December 31,

20X6

Unrestricted net assets:

Excess of revenues and gains over

expenses and losses $61,743 $60,262

Net assets released from restrictions for

capital expenditures - 119

Cumulative effect of change in

accounting principle - (3,943)

Increase in unrestricted net assets 61,743 56,438

Temporarily restricted net assets:

Contributions, gifts, and bequests 20,435 15,512

Investment income 8,455 3,972

Net assets released from restrictions for

research expenditures (14,070) (14,474)

Net assets released from restrictions for

capital expenditures - (119)

Increase in temporarily restricted net assets 14,820 4,891

Permanently restricted net assets:

Contributions, gifts, and bequests 1,794 3,218

Increase in permanently restricted net

assets 1,794 3,218

Net assets at beginning of year 606,262 541,715

Net assets at end of year $684,619 $606,262

Understanding Financial Statements,

cont.

• Statements of cash flows A. Operating activities

B. Investing activities

C. Financing activities

Understanding Financial Statements,

cont.

Statement of Cash Flows Example: Harris Memorial Hospital & Harris Community Foundation

Discussion: Why do you think

assessing cash flow

is important?

December 31,

20X7

December 31,

20X6

Operating Activities

Increase in net assets $78,357 $64,547

Adjustments to reconcile increase in net assets to net

cash provided by operating activities:

Change in net unrealized gains and losses on

investment securities (26,358) 11,432

Cumulative effect of change in accounting principle

- (3,943)

Depreciation 44,392 41,627

Gain on sale or disposal of assets, net (6,119) -

Provision for bad debts 55,851 57,975

Change in interest rate swap value and put

agreements (1,578) (9,397)

Changes in operating assets and liabilities:

Assets limited as to use (19,779) (14,274)

Accounts receivable (65,937) (51,251)

Other assets (7,071) (43)

Supplies (415) 840

Accounts payable 7,941 10,613

Accrued expenses and other liabilities 20,568 8,430

Due to third-party payors (5,253) (4,877)

Contingent professional liabilities (15,227) 3,743

Postretirement benefit obligation, other than

pensions 513 456

Net cash provided by operating activities $59,885 $115,878

Understanding Financial Statements,

cont.

Statement of Cash Flows Example: Harris Memorial Hospital & Harris Community Foundation

Discussion: Did the organization

improve its overall

cash position from

20X6 to 20X7?

December

31, 20X7

December

31, 20X6

Investing Activities

Property and equipment acquired (142,793) (159,943)

Cash used in investing activities (142,793) (159,943)

Financing Activities

Repayment of long-term debt (177,294) (5,545)

Proceeds from borrowing 283,321 57,614

Net cash provided by financing

activities 106,027 52,069

Net increase in cash and cash

equivalents 23,119 8,004

Cash and cash equivalents at

beginning of year 59,696 51,692

Cash and cash equivalents at end of

year $82,815 $59,696

Understanding Financial Statements,

cont.

• Footnotes: Common sections

A.Organization information

B.Accounting policies

C.Additional information on financial statement items

1. Asset example: Net property, plant, and equipment

calculation

2. Liability example: Bond series information

3. Net asset example: Notes on types of restrictions

4. Revenue example: Breakout for gross charges

Understanding Financial Statements,

cont.

Footnotes Example: Harris Memorial Hospital & Harris Community Foundation

Discussion: If I need to get

accumulated

depreciation for a

financial ratio

calculation, what

value do I use?

December

31, 20X7

December

31, 20X6

Land and improvements $26,945 $26,610

Buildings and improvements

expenditures 447,897 265,965

Fixed and movable equipment 469,441 427,882

Construction-in-progress 112,880 189,807

1,057,163 910,264

Less accumulated depreciation 493,814 451,435

$563,349 $458,829

Property, Plant, and Equipment Footnote

Understanding Financial Statements,

cont.