A Special Thank You to:
Dr. David M. Yousem, M.D., M.B.A.Professor, Department of RadiologyVice Chairman of Program DevelopmentDirector of Neuroradiology
Johns Hopkins Hospital
for allowing the use of his material/content in this presentation
Dr. Yousem’s online lecture series can be viewed at:http://webcast.jhu.edu/mediasite/Catalog/pages/catalog.aspx?
catalogId=7e18b7d5-9c63-487e-aaf1-77a86f83b011
Dr. Yousem’s project was funded through an RSNA Educational Grant
Accounting Overview
• Regulatory Agencies• The Balance Sheet• Income Statement• Statement of Cash Flows• Budgets• Accounting Entities• Insurance
REGULATORY AUTHORITIES
• Financial Accounting– Financial Accounting Standards Board (FASB)
• Tax Accounting– Internal Revenue Service (IRS)
Financial Accounting Standards Board (FASB)
• Has authority to set financial accounting standards– Recognized by:
• Securities & Exchange Commission (SEC)• American Institute of Certified Public Accountants
(AICPA)
• Standards = Generally Acceptable Accounting Principles (GAAP)
GAAP Hierarchy
• A. Statement of Financial Accounting Standards (FASB)– Greatest authority
• B. Technical Bulletins (FASB)• C. Consensus Position. Emerging Issues Task Force (FASB)• D. Accounting Interpretations (FASB)• E. Statement of Financial Accounting Concepts
– Least authority
Bookkeeping ≠ Accounting
• Bookkeeping– Chronological documentation of economic events for later
use by an accountant.
• Accounting– Integrating and “making sense” of bookkeeping information
and preparation of various financial reports to assess financial performance.
THE BALANCE SHEET
• = Statement of financial condition• Composed of two columns that balance and equal each other:
Assets = Liabilities + Retained Earnings• Assets and Liabilities are each divided into two sections:
– Current• “An asset or liability that can be liquidated or will come
due in the next 12 months.”– Noncurrent
• Same as current, except ranges past the next 12 months.
Importance of Ratios
• Working Capital
= Current Assets ÷ Current Liabilities– Ideally a ratio of 2:1 or higher is sought– Measure of how liquid a company is…
• The more money and less liability ~ the better off the company
Assets (Cash + Accounts Receivable + Inventory)
• Quick Assets Ratio (Asset Test Ratio)
= (Current Assets-Inventories) ÷ Current Liabilities– Important ratio when a company has a lot of inventory
included on the balance sheet– Inventory is the least liquid current asset
• Accounts Receivable– Amounts due from patients/insurance companies
• Other assets– Deferred: Payments now for next year’s expenses– Intangible Assets– Fixed Assets: Property, plant, and equipment
Liabilities
• Debt + Accounts Payable + Accrued Expenses + Stockholders Equity– Debt
• Typically, real estate and equipment purchases in radiology practices
– Accounts Payable• Amounts owed to vendors/suppliers
– Accrued Expenses• Items expensed but not yet paid for.
– e.g. Taxes, Salaries, Legal Fees
INCOME STATEMENT
• Summary of income and expense items for a given period of time– Contrary to Balance Sheet, which looks at a specific date
• Bottom Line (Profit)
= (Income – Expenses)– Other names:
• EBT (Earnings before taxes)• EBITDA (Earnings before interest, taxes, depreciation, &
amortization)
STATEMENT OF CASH FLOW
• Summary of inflow and outflow during a specified period
• Critical to assessing the immediate needs of the company– Primarily relating to liquid assets
• Balance Sheet + Income Statement + Statement of Cash Flow– Basic components to financially evaluate a business
BUDGETS
• Important to establish benchmarks for a company to compare actual performance
• “Variances” = deviations in the budget• “Red Flags” = Large deviations/fluctuations• Budgeting for internal use only• Need both annual and long-term budgets
– Useful models:• Rolling forecasts- prior year plus percentage increase
– Allow performance evaluation of different segments within the company
BUDGETS
• Profit Margin = Operating Income ÷ Revenues• Most budgets forecast to operating income (profit)
– Also called EBIT (Earnings before interest and taxes)
• Revenue is proportional to volume • Variable expenses change in proportion to revenue– Fixed expenses to be considered:
– Rent, Salaries, Benefits, Insurance
• Depreciation– Must be incorporated in budget, with a tax benefit if deducted
on accelerated basis
– Based on IRS general depreciation systems
ACCOUNTING ENTITIES
• Three entities in radiology private practice– C corporation– Partnership/pass-through entity
• Partnership• S corporation• Limited liability company (LLC)
– Sole proprietorship
C Corporation
• Regular corporation– File annual income tax – Pay tax on taxable income
• Note: THE STOCKHOLDERS PAY ANOTHER TAX ON DIVIDEND DISTRIBUTIONS (Double Taxation)
Partnership/Pass-through Entities
• File annual tax returns, but do NOT pay income taxes
• Each return issues a Form K-1 to each investor – Reports the percentage share of each income & deduction
for each investor
• Investors report their share of income and deductions on their respective tax returns
• Essentially, taxation only at investor level
S Corporation
• Must meet certain criteria– Can only have a single class of stock (no common or
preferred stock)– 75 or less stockholders– Shareholders have limited liability
• Only their investment is at risk• If sued, the assets of the corporation, not the investors’,
are available for collection.
Partnership
• Similar to S Corporation• Any number and types of partners• General Partnership
– All partners are general and all are fully liable for partnership debts
• Partners may have to contribute additional assets to satisfy debts
• Limited Partnership– One general partner and numerous limited partners
• Limited partners liable for debt only up to their investment
LLC – Limited Liability Companies
• Hybrid of C corporation & partnership• Can be taxed as either C corp or partnership if >1 partner• If one member only, can be taxed as C corp or as “disregarded entity”
– Report income and deductions on personal tax return• No Form K-1
• Members liable only for their extent of their investment– Similar to S corp
• No requirement that member has general liability for LLC debts
State-dependent restrictions
• In many states, professional practices not allowed to organize as LLC’s, partnerships, or C corporations– Separate entities
• Professional Associations (PA)• Professional Corporations (PC)• Professional Limited Liability Companies (PLLCs)
– Must be licensed by state authority (medical board)– Taxed like C corporation or pass through entity– Can protect each investor from the liability of the other
members malpractice
INSURANCE
• In addition to malpractice insurance….– Umbrella Policy– Disability Insurance– Key-man Insurance
• Can fund any buyouts in multi-partner practices• Life insurance is paid out to the practice, which is then
used to purchase the deceased doctor’s interest in the practice from the heirs
Personal Life Insurance
• Consider establishing an Irrevocable Life Insurance Trust (ILIT)– Usually insurance benefits pass tax-free to beneficiaries, but
proceeds are included in your gross estate, thus subject to income tax
– If policy purchased and owned by ILIT, insurance proceeds should not be included in your estate, thus not taxed
• Also, deducting disability insurance premiums is generally not recommended, despite their short-term tax savings– If they are not deducted, upon payment they will not be taxed
Additional Resources/Reading
• ACR Residents & Fellow Section on Dollars & Sense
http://rfs.acr.org/dollars_sense/
• Radiology Business Practice: How to Succeed. Ed. David M. Yousem & Normal Beauchamp, Jr. Saunders/Elsevier 2008.