1. Certified Healthcare Financial Professional
Module I The Business of Health Care
Course 2: Financial Accounting Concepts
Original Presentation has been modified
Dr. Christina Bradbury, DBA, CMA, CHFP
Assistant Professor of Accounting/Finance at Plymouth State University

2. Learning Objectives Describe the basic elements of accounting
Differentiate between the key financial statements and what they describe.
Conduct a basic analysis of an organization’s financial condition using financial statements;
Relate basic measures of operational performance to an organization’s financial statements; and

3. Financial Statements provide a window into the business.
Operating Performance
Economic Resources
Creditor Obligations
Equity Capital
Cash Generated
Cash Spent
Income Statement –speaks to the profitability of the firm indicating sources of revenue and the expenses which reduce profit.
The Balance Sheet –available resources and claims to those resources.
Statement of Cash Flows –outlines sources and uses of cash.

4. Interested Parties: Management
Investors –For Profit / Donors -Not For Profit
Creditors
Suppliers and Customers
Employees
Competitors
Governmental Agencies

5. The Accounting Equation
Basic Equation:
Assets =
Liabilities +
Equity
Assets either possess (i.e., cash) or create (i.e., buildings and equipment) economic benefit to the business.
Cash & cash equivalents
Short-term investments
Net patient accounts receivable
Inventories
Long-term Investments
Property & Equipment

6. The Accounting Equation
Basic Equation:
Assets =
Liabilities +
Equity
Liabilities represent claims against the business. Failure to meet these claims can result in bankruptcy and potential closure.
Notes payable
Accounts payable
Accrued expenses
Mortgage debt
Other Long-Term debt

7. The Accounting Equation
Basic Equation:
Assets =
Liabilities +
Equity
Equity represents the non-liability claims against a business’s assets.

8. Transaction Analysis “Double- Entry” Accounting
Borrowed $4,000 from 1st American Bank.
2. Purchased equipment for $15,000 cash.
3. Purchased supplies of $200 and equipment of $1,000 on account.
+$4,000 =
+$4,000
-$15,000
+$15,000 =
+$200
+$800 =
+$1,000
+$5,000 =
+$5,000
“Double- Entry” System

9. The Financial Statements
For Profit
Not-for-Profit
Balance Sheet
Statement of Financial Position
Income Statement
Statement of Operations
Statement of Cash Flows

10. The Balance Sheet (1)

11. Sample Balance Sheet (1)
Assets
Cash $ 40
Accounts receivable 100
Land 200
Total assets $340
Liabilities
Accounts payable $ 50
Notes payable
$200
Must Equal
Owners’ Equity
Paid-in capital $100
Retained earnings
$140
Total Liabilities
and Owners’ Equity $340

12. The Income Statement (2)
The income statement provides information about a business’s operations and economic profitability.

13. The Income Statement (2)
Revenues
(less)
Expenses
equals
Net Income (or Net Loss)
Revenues
Increase in a company’s resources from the sale of goods or services
Expenses
Costs incurred in the normal course of business to generate revenues
Net Income (or Net Loss)
Revenues - Expenses

14. Revenues
Revenues are shown in several different formats depending on the type of provider.
Patient service revenue: Net as opposed to Gross.
Bad Debt- patients unwilling to pay.
Charity Care- patients unable to pay.
Patient service revenue as opposed to other operating revenue or nonoperating income.

15. Relationships between the balance sheet and income statement
Balance sheet reserves and income statement revenues
Income statement timing differences regarding receivables… Impacts the balance sheet

16. Statement of Cash Flows (3)
The statement of cash flows combines both income statement and balance sheet data to create an income statement-like report that focuses on cash flows.
It is designed to answer three questions:
Where did the business get its cash?
What did it do with the cash it got?
How did its cash position change?

17. Cash Flows (3)

18. Accepted Accounting Methods
Accrual (must adhere to GAAP reporting)
Cash
Fund

19. The “Matching Principal”
Accrual Basis Accounting:
Revenues and expenses are recorded as they are earned and incurred, not necessarily when cash is received or paid.
Better measures a firm’s performance than does cash flow data.

20. Generally Accepted Accounting Principles
“GAAP” Accounting
Method of recording accounting transactions

21. Cash Basis of Accounting:
Cash basis accounting is similar to how people normally keep their personal checkbook – recording revenue when received and deposited to the bank and recording expenses when a payment is made.

22. Recap: Accrual vs. Cash Basis
Cash accounting recognizes an event when a cash transaction takes place.
Accrual accounting recognizes an event when an obligation is created.
Provides a better picture of the true economic status of a business, but is more complicated & required by GAAP.

23. Fund Accounting:
Not-for-profit providers with restricted (endowment) contributions are required to create more complex balance sheets according to fund accounting rules.
Assets and liabilities are classified as:
Unrestricted
Temporarily restricted
Permanently restricted

24. Financial Statements provide a window into the business.
Operating Performance
Economic Resources
Creditor Obligations
Equity Capital
Cash Generated
Cash Spent
Financial statements are RELEVANT!
We’ve established what they are, what information they impart and too that there are several interested parties in this information. Now let’s talk a little about the PRACTICAL USE of financial statements.

25. Financial Ratio Analysis
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An item on a financial statement has little meaning by itself. The meaning of the numbers can be enhanced by drawing comparisons! \
Financial Ratio Analysis

26. Financial Ratio Analysis:
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Financial Ratio Analysis:
Ratios are calculated from current year numbers on the financial statements and then compared to: 1)previous years, 2) some target, 3) a competitor and 4) the industry.
Usually, the “what happened” is described using an operational metric. Operational metrics are simple ratios that describe the volume of services provided to patients or members or the resources used to provide services.

27. Profitability Liquidity Capital Structure
Financial Ratio Analysis- Using a medical metaphor, we may characterize a company as being ill, healthy, or fit. What matters is where the firm lies on the spectrum of health. The following three major ratio classifications help expose the firm’s condition:
Profitability
Liquidity
Capital Structure

28. Profitability Ratios
Profitability ratios measure the measures the extent to which the entity is generating a surplus . It examines the overall impact of operating decisions on a business’s financial condition.
Operating Margin
This ratio measures operating profitability as a percentage of revenues.
Net Profit Margin
This ratio measures net profitability as a percentage of revenues.
Medical Loss Ratio- Used by Managed Care Organizations
This ratio measures the proportion of premium revenues spent on the cost of medical care to its members.
Administrative Load – Used by Managed Care Organizations
This ratio measures the percentage of total premiums expended for administrative costs.

29. Liquidity Ratios
Liquidity ratios measure a firm’s ability to meets its cash obligations as they become due. Firms must balance the need for liquidity with the costs associated with maintaining liquidity.
Current Ratio
Measures the dollars of current assets per dollar of current liabilities. The higher the current ratio, the greater a business’s liquidity.
Days in Cash
Measures the number of days that the organization could continue to pay its average daily cash obligations with no new cash resources becoming available.
Net Days in Accounts Receivable
Measures the average time that it takes an organization to collect its receivables.
4 Days in Payables
Measures the average amount of time that elapses before the organization meets its current liabilities

30. Capital Structure Ratios
Capital structure ratios (solvency) – measures how the assets for an entity are financed, as well as its ability to pay its long-term debts. Such measures are important because the use of financial leverage affects both the risk and profitability of a business.
1 Debt to Equity
Measures the dollar amount of debt financing per dollar of equity financing.
2 Debt Service Coverage
Measures the number of dollars of cash flow available to make debt payments per dollar of debt expense.

31. we can begin to evaluate the Overall Financial Health of the Business!
By categorizing ratios as profitability, liquidity and capital structure and further by comparing these financial statement ratios with previous years, some target, a competitor or the industry,
we can begin to evaluate the Overall Financial Health of the Business!
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Overall financial health of the business?
Fit
Sick
Healthy

32. Limitations of Financial Statements and Financial Ratio Analysis
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Limitations of Financial Statements and Financial Ratio Analysis
It may be difficult to find a meaningful set of industry-average ratios.
Financial statements are not exact.
Ratio analysis is backward-looking.
Different accounting practices can distort comparisons.
It is difficult to generalize about whether a ratio is good.

33. Q&A on topic of Financial Accounting Concepts
Contact Information: Dr. Christina Bradbury, DBA, CMA, CHFP Accounting/Finance Faculty- Plymouth State University