Part IV: Report and Measure Financial Results

CHAPTER 9:

REPORTING

Reporting

The four major reports are:

Balance sheet

Statement of revenue and expense

Statement of changes in fund balance/net worth

Cash flow statements

Each has its own contribution to the whole.

Reporting

The basis of reporting is either cash or accrual.

Cash Basis Accounting: Transaction doesn’t enter the books until cash is either received or paid out.

Accrual Basis Accounting: Revenue is recorded when it is earned (not when payment is received) and expenses are recorded when they are incurred (not when they are paid).

Most health care organizations are on the accrual basis. The reports in this chapter have been prepared using the accrual method.

Reporting

Balance Sheet

The balance sheet records what an organization owes, and basically, what it is worth.

The balance sheet is stated at that particular time. Like a snapshot, it freezes the figures and reports them on a certain date.

Reporting

The balancing of the elements in the balance sheet represent:

Assets = Liabilities + Net worth / Fund balance

Balance Sheet

See Exhibit 9-1, the practice exercise and the Metropolis case study in Chapter 18.

Reporting

This statement records the inflow (revenue) along with the outflow (expense) and the net result (income or loss).

This statement covers a period of time (a month; a quarter; a year). If the balance sheet is like a snapshot, then the statement of revenue and expense is like a diary; for it is a record of transactions over a period of time.

Statement of revenue and expenses

Statement of revenue and expense

Reporting

The reporting of the elements in the statement of revenue and expense represents:

operating revenue - operating expenses = operating income

See Exhibit 9-2, the practice exercise and the Metropolis case study in Chapter 18.

Balance Sheet & Statement of Income Components: Practice

Look on pages 261-262 and identify the following items on the

Doctors’ Balance Sheet and Statement of Net Income.

Current Liabilities

Total Assets

Income from Operations

Accumulated Depreciation

Total Operating Revenue

Current Portion of Long-Term Debt

Interest Income

Inventories

30,000

1,000,000

80,000

480,000

180,000

10,000

-0-

5,000

ReportingStatement of changes in fund balance/net worth

This statement records changes in equity over the reporting time.

Think of the balance sheet, the statement of revenue and expense and the statement of changes in fund balance/net worth as locked together — the statement of changes in fund balance is the mechanism that links the other two statements.

Balance Sheet & Statement of Revenue Components: Practice

Look on pages 283-284 and identify the following items on the

Metropolis Balance Sheet and Statement of Net Revenue.

Current Liabilities

Total Assets

Income from Operations

Accumulated Depreciation

Total Operating Revenue

Current Portion of Long-Term Debt

Interest Income

Inventories

Current Year Prior year

$ 5,825,000

32,800,000

1,700,000

26,100,000

35,100,000

525,000

80,000

900,000

$ 6,300,000

32,000,000

840,000

24,200,000

34,600,000

500,000

40,000

850,000

Reporting

The reporting of the elements in the statement of changes in the fund balance/net worth represents (in a simplified format):

Beginning balance + operating income = ending balance, or

Beginning balance - operating income = ending balance.

Statement of changes in fund balance/net worth

See Exhibit 9-3, the practice exercise and the Metropolis case study in Chapter 18.

Reporting

Cash flow statement

This statement, in effect, takes the accrual basis statements and converts them to a cash flow for the period through a series of reconciling adjustments that account for non-cash amounts.

Reporting

Cash flow statementIn accrual accounting, if cash is not paid or received when revenues and expenses are entered on the books, what happens? The other side of the entry is Accounts Receivable (for revenue) and Accounts Payable (for expense). These accounts rest on the balance sheet andhave not yet been turned into cash. Another accrual characteristic is recognition of depreciation. Depreciation is recognized within each year as an expense, but it does not represent a cash expense (see text in chapter). All these non-cash amounts are reconciled within the cash flow statement.

Reporting

Cash flow statementThe reporting of elements in the cash flow statement represents the following (in a simplified format):

Accrual basis beginning balance +/- reconciling non-cash entries = cash basis ending balance.

Cash flow adjustments are much clearer when looking at an example. See Exhibit 9-4, the practice exercise and the Metropolis case study in Chapter 18.

ReportingSubsidiary statements

See the Metropolis case study for good examples of subsidiary statements.

Provide more detail (than the major statements)

The support (and are subsidiary to) the major statements

Depreciation Concepts: Example

Straight Line:Step 1. Compute the cost net of salvage or trade-in value: 200,000 less 10 percent (S or T value) = $180,000Step 2.Divide by expected life years (aka estimated useful life) = $18,000 depreciation per year for 10 years.

Accelerated:Step 1. Compute the straight-line rate: 1 divided by 10 equals 10 percent.Step 2. Double the rate (as in double declining method): 10 percent times 2 equals 20 percent.Step 3. Compute the first year’s depreciation expense: $200,000 X 20% = $40,000.Step 4. Compute the carry-forward book value at the beginning of year two: $200,000 – 40,000 = $160,000.Step 5. Compute the second year’s depreciation expense: $160,000 X 20% = $32,000.Step 6. Compute the carry-forward book value at the beginning of year three: $160,000 – 32,000 = $128,000..

-Continue until the asset’s salvage or trade-in value has been reached.

Depreciation Concepts: Practice

600,000 600,000 x 20% = 120,000 600,000 - 120,000 = 480,000

480,000 480,000 x 20% = 96,000 480,000 - 96,000 = 384,000

384,000 384,000 x 20% = 76,800 384,000 - 76,800 = 307,200

307,200 307,200 x 20% = 61,440 307,200 - 61,440 = 245,760

245,760 245,760 x 20% = 49,152 245,760 - 49,152 = 196,608

196,608 196,608 x 20% = 39,322 196,608 - 39,322 = 157,286

157,286 157,286 x 20% = 31,457 157,286 - 31,457 = 125,829

125,829 125,829 x 20% = 25,166 125,829 - 25,166 = 100,663

100,663 100663 x 20% = 20,132 100,663 - 20,132 = 80,531

80,531 80,561 at 10th year: 80,561 - 20,561 = 60,000

--Balance remaining at end of tenth year represents the salvage or trade-in value.

Book Value at

Beginning of YearDepreciation Expense

Book Value at

End of Year

Depreciation Concepts: AssignmentStraight Line:

1a. Lab. Equipment: $300,000 – S or T value of $15,000 = $285,000 / 5 years = $57,000 per year.1b. Rad. Equipment: $800,000 – S or T value of $80,000 = $720,000 / 7 years = $102,858 per year.

Double declining depreciation for the laboratory equipment

YearBook Value at

Beginning of YearDepreciation Expense

Book Value at

End of Year1

2

3

4

5

300,000

180,000

108,000

64,800

38,880

300,000 X 40% = 120,000

180,000 X 40% = 72,000

108,000 X 40% = 43,200

64,800 X 40% = 25,920

38,880 – 15,000 = 23,880

300,000 – 120,000 = 180,000

180,000 – 72,000 = 108,000

108,000 – 43,200 = 64,800

64,800 – 25,920 = 38,880

38,880 – 23,880 = 15,000

Double declining depreciation for the radiology equipment

YearBook Value at

Beginning of YearDepreciation Expense

Book Value at

End of Year1

2

3

4

5

6

7

800,000

571,440

408,180

291,563

208,263

148,763

106,262

800,000 X 28.57% = 228,560

571,440 X 28.57% = 163,260

408,180 X 28.57% = 116,617

291,563 X 28.57% = 83.300

208,263 X 28.57% = 59,500

148,763 X 28.57% = 42,501

106,262 X 28.57% = 26,262

800,000 – 228,560 = 571,440

571,440 – 163,260 = 408,180

408,180 – 116,617 = 291,563

291,563 – 83,300 = 208,263

208,263 – 59,500 = 148,763

148,763 – 42,501 = 106,262

106,252 – 26,262 = 80,000