Health Care Research Project

1. Students will collaborate within their assigned groups to complete deliverable two.

2. Read and analyze the following selected parts of the10-Ks covering all years conforming with your spreadsheets and identify a risk factor that you find of interest that could come true.

3. Conduct a “what-if” analysis to determine the affect the risk may have on the financials.

4. Answer three short essay questions.

5. Individually upload the document via Blackboard.

Students will continue to collaborate within their assigned groups to complete this deliverable. You are to elect a new group leader to centralize group communications and reviews.

The following areas of the 10-Ks should be your primary focus: Part 1, Items 1, 1A, 2, 3, and Part II, Items 7 and 8. Part I contains a discussion on the business model, risk factors, properties, and legal issues. Part II contains Management’s Discussion and Analyses, the financial statements and the notes to the financial statements. All these statements are referred to as management assertions. Parts I and II contain discussions on many types of risk that the business may be exposed to. You should read through all these areas. Once you have read through Parts I and II, you are to answer a set of questions at the end of this section of deliverable two. The following narrative elaborates on each area you are to read.

Part 1, Item 1. Business

In this discussion, management discusses its business model, how it segments it financial information, and how it categorizes and earns revenue.

Part 1, Item 1A. Risk Factors

In this discussion, management discusses the risks that it has identified as material and has decided to share with the public. Companies have to disclose risks, and the SEC mandates a separate section to discuss risks. However, risks can be identified by reading other areas of the Annual Report and observations of the hospitals.

As an example, here is a short list of some material risks a major US corporation discloses:

1. Economic conditions in the U.S. and international markets could adversely affect our business and financial results.

2. Our success depends substantially on the value of our brands and failure to preserve their value, either through our actions or those of our business partners, could have a negative impact on our financial results.

3. Incidents involving food or beverage-borne illnesses, tampering, adulteration, contamination or mislabeling, whether or not accurate, as well as adverse public or medical opinions about the health effects of consuming our products, could harm our business.

4. The unauthorized access, use, theft or destruction of customer or employee personal, financial or other data or proprietary or confidential information that is stored in our information systems or by third parties on our behalf could impact our reputation and brand and expose us to potential liability and loss of revenues.

5. We rely heavily on information technology in our operations and growth initiatives, and any material failure, inadequacy, interruption or security failure of that technology could harm our ability to effectively operate and grow our business and could adversely affect our financial results.

6. We may not be successful in implementing important strategic initiatives or effectively managing growth, which may have an adverse impact on our business and financial results.

7. We face intense competition in each of our channels and markets, which could lead to reduced profitability.

Part 1. Properties

In this discussion, companies disclose select properties that it owns, providing locations, sizes and purposes. This information can help a reader understand what properties may be at risk and how your company’s operations could be affected if something were to happen to one or more properties.

Part 1. Legal Proceedings

Companies normally elaborate on their legal proceedings in Commitments and Contingencies.

Part II. Management’s Discussion and Analyses

This discussion is management’s interpretation of the results of its operations. An important point to be made is that this is management’s interpretations, not by anyone else. Management of companies tend to highlight the positive and suppress the negative. They tend to guide the discussion they way they want. In this section, you may get a better idea what risks management may find important and those they may try to minimize. For your purposes, it is filled with good information that may help you further understand the trends in the horizontal, vertical, and ratio analysis that you performed.

Part II. Index to the Notes to the Consolidated Financial Statements

In this discussion, management further clarifies information contained in the income statement, balance sheet and statement of cash flows. Companies disclose varying amounts of notes. However, for purposes of this project we focus on the Summary of Significant Accounting Policies, which discusses the business, estimates, cash and cash equivalents, Receivables, net of Allowance for Doubtful Accounts, Property, Plant and Equipment, and Revenue Recognition. Notes that discuss inventories in detail that give you insight on where your company gets it inventory and how it categorizes it. Notes that contain Supplemental Balance Sheet Information, which discusses Property, Plant and Equipment, and Accrued Liabilities. Notes that discuss Debt (Liabilities). You may want to read it just to see how complex accounting for debt can be and the risks that your company takes to pay back financing agreements.

Notes that discuss Commitments and Contingencies: What is important in this section is the legal proceedings, which is a gold mine for identifying potential risks.

Essay questions one and two will require you to conduct a “what-if” analysis. There are various methods to conduct a “what-if” analysis in Excel and you are free to explore them. To conduct a “what-if” analysis for this deliverable, imagine the risk you identified comes true. Demonstrate through vertical, horizontal and ratio analysis how this risk could affect financial performance.

To begin this process, you need to understand what accounts could be affected if the risk you choose comes true. Let’s say that you identified a possible supply chain disruption of medicine because of new regulation in the country it is manufactured. What are medications at a hospital? It is inventory. On the income statement, sold inventory is reported as cost of sales. On the balance sheet, existing medications in your company’s possession is reported as inventory. Lack of supply can lead to increased inventory prices. To examine the potential overall affects on the financial statements, we must look at ratios that contain cost of sales or inventory in its numerator or denominator. When looking at vertical analysis, anything that affects cost of goods sold will cause a shift in the percentage of expenses to revenues; and anything that affects inventory will reallocate the percentage mix of assets to total assets. When looking at horizontal analysis, the percentage year over year increases for both cost of sales and inventory will be affected.

Let’s take an example of a ratio that contains cost of sales, which is the gross profit margin. The gross profit margin is the gross profit/net sales. Gross profit is Net Sales – Cost of Sales. If the supply chain is disrupted and medication prices rise, the cost of sales will rise when the medication is dispensed. Therefore, the gross profit will decrease. If your company’s net sales of medication remain the same, the gross profit margin will decrease. There are other ratios that would be affected. When you consider a supply chain disruption as your risk, find ratios in addition to the gross profit margin and explain the affect on them.

For vertical analysis, you can discuss how the cost of sales affects the income statement by the reallocation of cost of sales to revenues and what that situation may mean. For the balance sheet, the reallocation of percentages of short-term assets may. A vertical analysis allows a user of financial information to visually see how the mix of short-term assets are affected which may impact liquidity (measuring the ability of a business to pay its short term obligations as they become due). The more assets tied up in inventory may be problematic to companies in need of cash to pay bills.

After conducting a “what-if” analysis, you are to answer the following questions from an accounting perspective (not a marketing/management perspective) and submit an individual two to three page report via Blackboard:

1. companies required to disclose material risks.

a. Of the risks that management discloses, which one do you think could most adversely affect the income statement, balance sheet, and cash flow statement and give an example of how it could adversely affect the financial statements?

b. Which ratios could be adversely affected if increases in costs or supply chain disruptions occurred for materials including equipment, medications and other supplies? Explain why and provide an example with hypothetical figures of at least one ratio.

2. Compare your readings of management’s assertions and your findings of your vertical, horizontal, ratio and chart analysis. You may find that management’s discussion focuses on certain areas. They may be avoiding a discussion in other areas that you and others deem important to learn about.  They may be transparent one year, and not as transparent the next year, and vice-versa. Your vertical, horizontal and/or ratio analyses may indicate one thing, but not what management is focusing on, causing what appears to be inconsistencies in how information is presented.

a. How do you think management interprets and informs the public of one thing, but your analyses find information that is inconsistent, misleading, contradictory, or absent, leading you to believe the reported figures on the income statement, balance sheet, cash flow statement and related disclosures reveals a side of the financial story management in not focused on? Explain to the best of your ability and include a specific example.

To help you understand how to answer this question, Form 10-Ks normally follow specific patterns. It is important to read all three years to see how management modifies its discussion from year to year. The specific narrative in each section generally does not change too much unless new disclosure requirements or other laws/policies/procedures are enacted. This is often a company’s Achilles heel. If management is telling the public a similar narrative each year, the charts should show a consistent pattern. If not, something is may not be right. Management may not accurately report what is going on, be focused on what they want to focus on, or they are issuing the wrong figures on their financials. Either way, it is an issue that must be further explored to make good business decisions.

As an example of a potential issue, let’s look at a hypothetical scenario involving inventory turnover:

As you may remember, the inventory turnover ratio is a measure of how fast a company is getting rid of its inventory (through sales, obsolescence, theft, etc.). If you measure the inventory turnover ratio and it decreases slightly year over year, it generally indicates that inventories are moving slower. Imagine that you perform a ratio analysis and chart the inventory turnover ratio over six years. You notice that inventory is turning over slower. Then you compare the chart to what management asserts in its discussion and analysis. Management boasts about its improved and efficient inventory management systems and how year after year it is constantly improving.  This may indicate an area of increased risk. Why? The inventory turnover data shows that inventory may be moving slower, but management claims it improved ways to control inventory. It now becomes an issue for a proactive business decision maker to delve into more deeply. The ratios are indicating one thing (through their reported figures), but management is telling everyone another (through their narrative).  In this hypothetical situation, several things could be happening. Perhaps everything is fine with their inventory management system, but management is not doing a fine job of communicating the issue, or perhaps something could be drastically wrong such as production line breakdowns and management knows it but is not adequately disclosing it, or perhaps it could be that someone is stealing inventory but management does not realize it.  There could be numerous reasons.

You should target approximately one to two paragraphs for each required item. Grammar, Formatting and Organization is a skill which should be demonstrated by accountants for all work.  Therefore, it is part of the grade. Only Word files will be accepted i.e. ,doc format. Do not upload a pdf file or files created by other word processing software.

The team leader for this deliverable is responsible to make sure everyone gets a peer review of your work prior to submission. As discussed in the grading section for deliverable one, it is inevitable that you will share ideas and see other member’s work.

Late submissions lose 50% credit if submitted within one week after the due date. After one week past the due date, no credit will be given. Note that this deliverable still has to be completed to advance to the next deliverable. If it is not completed, no further credit will be given for the term project.