How to Improve Operating Margins
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MHA612CH09_PP.pdf
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 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
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
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: represents the accumulated depreciation taken on the asset to the date of the financial statement – this is different than “depreciation expense” on the Income Statement.
Goodwill: represents 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: represent investment in tangible, permanent assets; they are sometimes referred to as the capital assets (or net fixed assets) of the organization.
Understanding Financial Statements
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. Non-Current 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
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
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
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 non-cash 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
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
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
Statement of Changes in Net Assets A. Basic Equation
= + Income + Ending Balance
Beginning Balance
Transfers In
Transfers Out -
Understanding Financial Statements
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
Statements of Cash Flows
A. Operating Activities
B. Investing Activities
C. Financing Activities
Understanding Financial Statements
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
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
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
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
