Financial Statements

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Chapter 9

• Financial Statements

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Learning Objectives

• Understand the four financial statements
• Balance sheet
• Statement of operations
• Statement of changes in net assets
• Statement of cash flows
• Footnotes

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Understanding Financial Statements

• Balance Sheet
• presents a record of an organizations 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 organizations revenues and expenses
  during the accounting period typically, one
  year.

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Understanding Financial Statements

• 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 organizations structure,
  accounting practices, and financial standing.
  Not considered to be part of the four primary
  financial statements.

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Understanding Financial Statements

• Balance Sheet
• A. Current Assets
• Cash
• Cash Equivalents
• Accounts Receivable
• Inventory/Supplies
• Prepaid Expenses
• Limited use Current Assets
• Other Current Assets
• B. Assets Whose Use is Limited
• 1. By Board for Capital
• 2. Malpractice Funds
• 3. Bond Trustee

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)
Cash Cash EquivalentsCash consists of coin,
currency, and available deposited funds at banks.
Cash equivalents include savings accounts,
certificates of deposit, and other temporary
marketable securities.
Accounts Receivable Represent legally
enforceable claims on customers for prior
services or goods.
Assets Whose Use is Limited Typically, cash and
investments that can only be spent for specific
purposes
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Understanding Financial Statements
Property and Equipmentrepresent investment in
tangible, permanent assets they are sometimes
referred to as the capital assets (or net fixed
assets) of the organization.
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 entitys assets,
less any related obligations or liabilities
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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
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
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
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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?
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Understanding Financial Statements
Balance Sheet Example Harris Memorial Hospital
Harris Community Foundation
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

Discussion Where can additional information
regarding long-term liabilities be found?
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Understanding Financial Statements

• Statement of Operations
• A. Total Revenue
• 1. Net Patient Service Revenue
• 2. Other Revenue
• B. Expenses
• Wages Benefits
• Supplies
• Depreciation
• Interest
• Bad Debts
• Other
• C. Other Income Sources

Net patient service revenue The revenue from
patients after deductions from gross price
(charges).
Depreciation A non-cash expense that represents
the financial value an asset loses over some
period of time (usually defined by the assets
useful life)
Interest Expense paid as part of debt financing
Bad Debts The amount of charges that will not be
collected from patients from whom payment was
expected
Other income Examples include income on
endowments, tax support, income on reserves, and
gains and losses from sales of properties
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Understanding Financial Statements
Statement of Operations Example Harris Memorial
Hospital Harris Community Foundation
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
Discussion Is net patient revenue the full
charge amount to patients?
Discussion What is the difference between
doubtful accounts in A/R in the Balance Sheet and
bad debt expense?
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Understanding Financial Statements
Statement of Operations Example Harris Memorial
Hospital Harris Community Foundation
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

Discussion If I need to use net income for a
financial ratio, which line should I use?
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Understanding Financial Statements
Statement of Changes in Net Assets A. Basic
Equation

Ending Balance
Beginning Balance
Transfers Out
Transfers In
Income
-
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Understanding Financial Statements
Statement of Changes in Net Assets Example
Harris Memorial Hospital Harris Community
Foundation
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

Discussion What led to the organizations
largest changes in net assets?
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Understanding Financial Statements

Statements of Cash Flows A. Operating
Activities B. Investing Activities C. Financing
Activities
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Understanding Financial Statements
Statement of Cash Flows Example Harris Memorial
Hospital Harris Community Foundation
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
Discussion Why do you think assessing cash flow
is important?
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Understanding Financial Statements
Statement of Cash Flows Example Harris Memorial
Hospital Harris Community Foundation
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

Discussion Did the organization improve its
overall cash position from 20X6 to 20X7?
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Understanding Financial Statements

• Footnotes Common sections
• Organization information
• Accounting policies
• Additional information on financial statement
  items
• Asset example Net property, plant, and equipment
  calculation
• Liability example Bond series information
• Net asset example Notes on types of restrictions
• Revenue example Breakout for gross charges

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Understanding Financial Statements
Footnotes Example Harris Memorial Hospital
Harris Community Foundation
Property, Plant and Equipment Footnote
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