1. Part IV: Report and Measure Financial Results CHAPTER 9: REPORTING

2. 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.

3. 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.

4. 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.

5. 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.

6. 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

7. 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.

8. 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

9. Reporting Statement 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.

10. 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 YearPrior 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

11. 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.

12. 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.

13. Reporting Cash flow statement In 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 and have 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.

14. Reporting Cash flow statement The 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.

15. Reporting Subsidiary 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

16. 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) = $180,000 Step 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.

17. Depreciation Concepts: Practice 600,000600,000 x 20% = 120,000600,000 - 120,000 = 480,000 480,000480,000 x 20% = 96,000480,000 - 96,000 = 384,000 384,000384,000 x 20% = 76,800384,000 - 76,800 = 307,200 307,200307,200 x 20% = 61,440307,200 - 61,440 = 245,760 245,760245,760 x 20% = 49,152 245,760 - 49,152 = 196,608 196,608196,608 x 20% = 39,322196,608 - 39,322 = 157,286 157,286157,286 x 20% = 31,457157,286 - 31,457 = 125,829 125,829125,829 x 20% = 25,166125,829 - 25,166 = 100,663 100,663100663 x 20% = 20,132100,663 - 20,132 = 80,531 80,531 80,561 at 10 th 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 Year Depreciation Expense Book Value at End of Year

18. Depreciation Concepts: Assignment Straight 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 Year Book Value at Beginning of Year Depreciation Expense Book Value at End of Year 1234512345 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 Year Book Value at Beginning of Year Depreciation Expense Book Value at End of Year 12345671234567 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