Financial Statement Review & Analysis

Session 1Review
1) “Why” Accounting & Finance
2) Health Cost Drivers & Countermeasures
3) Ten Key Accounting Concepts
4) Accounting Equation A=L+NA The One Thing
5) Accounts & Transactions
6) Cash Basis versus Accrual Basis
7) Four Financial Statements
8) Fixed Asset (PP&E) & Depreciation
9) Basic Inventory Concepts
10) Footnotes to the Financial Statements
ACHE CEO Survey: Top Issues Confronting Hospitals
Post Pandemic Challenges
2023
2022
2021
1
Workforce challenges (e.g. shortages)
2.3
1.8
1.6
2
Financial challenges
2.6
2.8
4.1
3
Behavioral health/addiction issues
5.3
5.2
5.4
4
Access to care
5.6
6.0
5.7
5
Governmental mandates
5.7
5.9
5.4
Why
Understand the financial impact of decisions
Evaluate & promote organizational liquidity, solvency, performance
Develop financial acumen, skills, confidence
Selected Factors Contributing to the Rising Costs of Health Care
The
Payment
System
Prescription
Drug Costs
The
Uninsured
Aging
Population
Rising Costs
Chronic
Diseases
Technology
Compliance
& Litigation
Ex 1-4
Payer efforts to Bend the Cost Curve
Utilization Review
Gate Keepers
Prospective payment
Managed care, limited Networks
Capitation replacing FFS
Certificate of Need
$
Payment Denials
Bundled payments
ACOs
Move from Volume to Value
Time
10 Key Concepts
1. Money measurement
2. Entity
3. Going concern
criteria adopted to
4. Cost
help resolve
5. Accounting period
accounting issues.
6. Conservatism
7. Realization
8. Matching
9. Consistency
10. Materiality
2-6
The ONE Thing
Every transaction Impacts at least 2 accounts
Assets = Liabilities + Net Assets*
Assets = Liabilities + (Net Assets + Revenue – Expense)
*Equity
Temporary Accounts
2-7
Accounting Methods
Cash versus Accrual
Revenue
recognition
Expense
recognition
Cash Basis
$$ Received
$$ Paid
Accrual Basis
when Earned
when Incurred
Financial Statements
1) Statement of Financial Position (Balance Sheet)
2) Statement of Operations (Income Statement)
3) Statement of Change in Net Assets (Equity)
4) Statement of Cash Flows
General Ledger
Financial Statements
Accounts
Accounts
Accounts
Accounts
Transactions
Accounts
Accounts
Assets
Liabilities
Balance Sheet
Net Assets
Accounts
Accounts
Revenue
Accounts
Accounts
Expenses
Statement of
Operations
Balance Sheet
A specific moment in time
City Clinic
Assets
Liabilities
Listed in
Order of
Liquidity
What is owed
What is
owned
=
+ plus +
Balance Sheet
May 31, 2020
Assets:
Cash
$20,000
Net Patient AR
$100,000
Inventory
$25,000
Total Current Assets
$145,000
Net Assets
PP&E
$420,000
{aka Equity}
Investments
$50,000
Total Assets
$615,000
Liabilities:
Current
Assets
Liabilities
Cash or convertible to
Cash < 1 year Expect to be Paid < 1 year Non-current (LT) AP $40,000 Accrued Wages payable $5,000 All other Asset Total Current Liabilities LT Debt Expect to be Paid in > 1 year
$45,000
$300,000
Total Liabilities
$345,000
Net Assets:
Net Assets
Total Liabilities & Net Assets
$270,000
$615,000
Statement of Operations
Defined range of Time….
Month, Quarter, Year
City Clinic
Reports nature & magnitude of earnings.
Statement of Operations
Month ended 5/31/20
Revenue Accounts
Expense Accounts
Operating Revenue:
Patient Revenue
$1,100,000
Operating Expenses:
Wages & Benefits
$500,000
Supply Expense
$40,000
Advertising Expense
$25,000
Admin & Other Expense
300000
Depreciation Expense
$75,000
Total Operating Expense
$940,000
Excess of Revenue Over Expense
$160,000
Statement of Change in Net Assets
Shows what is responsible for
the Increase (decrease) in
Net Assets from BOY to EOY
General Ledger
Asset
Liability
Balance
Sheet
Net Asset
Revenue
Statement
of
Operations
Expenses
Statement of
Change in
Net Assets
Statement of
Cash Flow
Statement of Cash Flow
General Ledger
Asset
Liability
Balance
Sheet
Net Asset
Revenue
Statement
of
Operations
Expenses
Statement of
Change in
Net Assets
Statement of
Cash Flow
Shows what is
responsible for the
increase (decrease)
in Cash
Basic Format for the (Indirect method)
Statement of Cash Flows
1) Cash flows from Operating activities:
$$
Profit + Depreciation + CA & CL
2) Cash flows from Investing activities:
Acquisition and sale of LT assets
$$
3) Cash flows from Financing activities:
Borrowing & paying debt
Increase in cash and equivalents
Cash and equivalents at beginning of year
Cash and equivalents at end of year
$$
$$
$$
$$
Fixed Asset Accounting
1. Establish Capitalization Policy
Asset or Expense
Greater than 1 year and greater than set $? amount
2. Estimate useful life of the asset.
AHA Guide, Past Experience, vender, other
3. Estimate residual value (if any)
Past experience
4. Select Depreciation Method
Straight line or
Accelerated (DDB, SYD)
Definitions & Formulas
Acquisition Cost = All original cost necessary for first use
Depreciation Expense = (Acquisition cost – Salvage value)
Estimated useful life
Accumulated Depreciation = Sum of all years Depreciation expense
Book Value = Acquisition Cost – Accumulated Depreciation
Market Value = Price agreed to by a willing Buyer & Seller
Depreciation expense:
• the allocation of original cost to periods in which the asset is in use
• A non-Cash expense account found on the Income Statement
Accumulated Depreciation:
• The sum of all the depreciation recorded to date
• Recorded as a “Contra-Asset” account on the Balance Sheet
Net Book Value:
• Acquisition cost – Accumulated Depreciation
• Is NOT Replacement Value
• Is NOT Market Value
Year End
Acquisition Price (Cash)
Time 0
($100,000)
Year 1
Year 2
Year 3
Year 4
Year 5
Depreciation Expense (IS)
$20,000
$20,000
$20,000
$20,000
$20,000
Accumulated Depreciation (BS)
($20,000) ($40,000)
($60,000)
($80,000) ($100,000)
Net Book Value (BS)
$80,000
$40,000
$20,000
$60,000
$0
Depreciation – Other
• The asset may continue to be used, but the
Depreciation expense STOPS at the end of the
designated useful life
• Depreciation expense may be recorded by …
✓ Month placed in service
✓ Half year convention
Mercy hospital purchased a Medical Office Building (MOB) from a retiring physician for
$1,000,000. They spent an additional $250,000 for renovation & infrastructure
improvements and $30,000 for furnishings & equipment. They opened the new clinic on
January 1, 2022. They assigned 10% of the building purchase price to the land. They
assigned a useful life of 25 years to the building and 5 years to the equipment. The
hospital operates on a calendar year basis and does not assign salvage value to PP&E.
1) What was the Calendar year 2023 depreciation expense on these assets?
(1,000,000 – 100,000 + 250,000) / 25 = $46,000 Bldg.
(30,000 / 5) = $ 6,000 Equip.
$52,000 Total
2) What is the year end 2023 Total Net Book Value on these assets?
$1,280,000 – $52,000 – $52,000 = $1,176,000
Mercy Clinic
Land (10% of $1m)
Building & Upgrades
Equipment
Total PP&E
Costs
$100,000
$1,150,000
$30,000
$1,280,000
Life
n/a
25
5
Deprec
0
$46,000
$6,000
$52,000
Inventory Accounting
Terminology & Options
Periodic
vs.
Perpetual
FIFO versus LIFO
FIFO Assumes:
• Oldest (first) acquired items (lowest cost) are sold (expensed) first
• Ending Inventory consist of the latest (higher cost) items.
LIFO Assumes:
• Most recent acquired items (higher cost) are sold (expensed) first
• Ending Inventory consist of the oldest (lower cost) items.
FIFO
INPUTS
Third
March
Second February
First
January
M $$$
F $$
J
$
J
1
F M
2
LIFO
3
M F
J
1
3
2
Greater initial Profits
Greater Ending Inventory
Lower Year 1 Taxes
Lower Ending Inventory
The Auditor’s Report
Opinion letter to the Board of Directors or Trustees.
Types of Audit Opinions
1) Unqualified opinion – “clean opinion”.
(fair presentation in compliance with GAAP)
2) Qualified opinion –
(in compliance, except for…).
3) Disclaimer of opinion –
(uncertain going concern).
4) Adverse opinion (material misstatements & or non-compliance).
Common Notes to the Financial Statements
➢Organization
➢Accounting policies
➢Fixed Assets (PP&E)
➢Pledges Receivable
➢Non-current Liabilities
➢Business Combination
➢Insurance
➢Long Term Debt
➢Functional Expenses
➢Business Concentration
➢Grant Awards
➢Risk factors
➢Investments
➢Subsequent Events
Charity Care Foot Note
Caution:
Charity Care Cost versus Charges
Complete
Section 3
IBNR – Incurred but not reported
Claims Made vs Occurrence
What is the difference?
An occurrence policy has lifetime coverage for the incidents that
occur during a policy period, regardless of when the claim is
reported.
A claims-made policy only covers incidents that happen and are
reported within the policy’s time frame, unless a ‘tail’ is purchased.
What issues does the difference create for
the organization and the provider?
Defined Benefit Plan
Defined Contribution Plan
Is Social Security an
example of a DB or DC
plan?
401k, 403b
Key Pension Terminology
Participant Vesting
Pension Benefit Guaranty Corp. (PBGC)
Actuaries
Discount rate
Projected Earnings Rate
Investment Performance
Defined Benefit
Defined Contribution
X
X
X
X
X
X
X
Matching Funds
Pension Benefit Obligation (PBO)
Funding Fluctuations
Expense Fluctuations
X
X
X
X
X
Other Types of Retirement Plans:
Similar to a 401k but exclusive to Non-profits
Why would a employee choose to participate?
DB Plan Example:
DB Plan
< 80% PBGC Self Insurance Example: Self Insured Programs can save money but come with additional RISK ✓ Professional Liability ✓ Health Insurance ✓ Worker’s Compensation ✓ Disability ✓ Unemployment Payer Mix: 1) Charges 2) Revenue 3) Accounts Receivable Why is this 55.4% important? Accounts Receivable by Payer Atlantic General Community Hospital AR Payer Mix Medicare Medicaid Commercial Mged Care Self-pay Calvert Health System AGHC 26% 3% 16% 11% 44% 100% Which organization has greater AR risk? Calvert HS 39% 14% 29% 15% 3% 100% Management Letter Issued by the auditors to the Board & Management ✓ Points out any identified internal control weaknesses. ✓ Not ordinarily disclosed to outsiders. ✓ May include Management responses. A formal letter prepared by the auditor which discusses findings and recommendations for improvements in internal control, that were identified during the audit and were not required to be included in the auditor's report. i.e. Opportunities for greater separation of duties, enhanced disaster recovery, Corporate Compliance plan elements, better cyber security, etc Avoiding Audit Failures Government efforts have included the SarbanesOxley Act 2002 (SOX) ✓Requires more rigorous internal control systems, reporting financial transactions, and disclosure of conflicts of interest ✓Protections for whistleblowers ✓Rotation of lead audit partner ✓Signature of CFO & CEO Internal Controls The mechanisms, policies and procedures implemented by a company to 1) ensure the integrity of financial and accounting information, 2) promote accountability, 3) safeguard assets and 4) prevent fraud. Cost of controls Amount & extent of controls Risk of Errors Typical Internal Controls 1. Setting the control environment (emphasize the importance of honesty, integrity and ethics). 2. Maintain written policies and procedures (clearly defining role and responsibilities i.e. purchasing and approval authority). 3. Physical controls including oversite of equipment, computer access, check stock, etc. 4. Reconciling bank statements by someone other than those in AP, AR, Payroll. 5. Supervisor approval of payroll timesheets. 6. Two signatures required on checks over a certain dollar amount. 7. Separation of duties (i.e. the person handling money is not allowed to sign checks) 9) Internal audits and testing of areas of risk (payroll, petty cash, Expense reports, Bank Recs, etc) 10) Review of large transactions Corporate Compliance Plan: To avoid & prevent Fraud & Abuse Fraud & Abuse Fraud is defined as an intentional deception or misrepresentation made by a person with the knowledge that the deception could result in some unauthorized benefit to themself or some other person. It includes any act that constitutes fraud under applicable Federal or State law. Abuse is defined as provider practices that are inconsistent with sound fiscal, business, or medical practices, and result in an unnecessary cost to the payer. This includes billing for services that are deemed not to be medically necessary or that fail to meet professionally recognized standards for health care. Corporate Compliance is NOT just Financial: Emergency Medical Treatment & Labor Act (EMTALA) In 1986, Congress enacted the Emergency Medical Treatment & Labor Act (EMTALA) to ensure public access to emergency services regardless of ability to pay. 3.8) Source for Financial Information • Non-Profit form 990 • Publicly traded For Profits Where can we find Financial Statement? Tax Exempt organizations Web site IRS form 990 GuideStar (guidestar.org) EMMA (Electronic Municipal Market Access) Taxable Public companies Web site EDGAR (Electronic Data Gathering, Analysis, and Retrieval) SEC 10Q & 10K Taxable privately held organizations 1) What is “IRS Form 990”? IRS annual Non-profit informational tax return 2) Who must complete Form 990? All Non-profit organizations 3) What information does it contain? Financials, list Board Members & Officers (salaries) etc 4) Where can I get Form 990? Entity (website), the IRS, Guidestar.org Part 1. 2. 3. 4. 5. 6. Summary Signature Program service Accomplishments Checklist of required schedules Statement of IRS Filing Tax Compliance Governance Management & Disclosure 7. Compensation of Officers, Directors, key employees, 5 highest paid & independent contractors 8. Statement of Revenues 9. Statement of Functional Expenses 10. Balance Sheet Hospitals (Schedule H) Approx 40-100 pages Any lobbying activity? Audited Financial Statements? Tax exempt Bonds? Excess Benefit or Private inurement? Related Entities? Disclosure to the Board Conflict of Interest Compliance Policy Record Retention Policy Executive Compensation process disclosure Name Role Hours a week W-2 or 1099 comp. Related entity $$s Other Compensation A 10-K is a comprehensive report filed annually by a publiclytraded company about its financial performance and is required by the SEC. The report contains much more detail than a company’s annual report, which is sent to its shareholders before an annual meeting to elect company directors. An 8-K is a report of unscheduled material events or corporate changes at a company that could be of importance to the shareholders or the Securities and Exchange Commission. Also known as a Form 8K, the report notifies the public of events, including acquisitions, bankruptcy, the resignation of directors, or changes in the fiscal year. Question Explain the statement that managing an organization using only the financial statements is like trying to drive a car while focusing on the rear view mirror? “Past performance is not necessarily indicative of future results ….” Closing Pearls & Notable Quotes: “One more good idea and we are out of business…..” “For everything that is done there is a good reason, and then there is the real reason…..” “We need leaders who are Owners and not Renters” When someone says “it’s not about the Money”, it’s about the “Money” “No Margin, No Mission” 1 All of the following are Asset accounts EXCEPT a Property Plant and Equipment b Accounts Receivable c Net Assets d Inventory 2 All of the following are Liability accounts EXCEPT a Prepaid expenses b Accounts Payable c Long Term Debt d Accrued Liabilities 3 Which Statement best describes what the entity owns and what it owes? a Statement of Financial Position b Statement of Operations c Statement of Cash Flows d Statement of change in Net Assets 4 Which Statement best explains what happened to the organization's cash? a Statement of Financial Position b Statement of Operations c Statement of Cash Flows d Statement of change in Net Assets 5 Which Statement best explains the organization's current profitability? a Statement of Financial Position b Statement of Operations c Statement of Cash Flows d Statement of change in Net Assets 6 Which is NOT one of the sections of the Statement of Cash Flow? a Cash from Investing activities b Cash from Operating activities c Cash from Financing activities d Cash from Owner activities 7 Assets accounts are segregated into which of the following two categories? a Current and Non-Current b Non-Current and Long Term c Current and Intangible d Intermediate and Long Term 8 Asset accounts are typically arrayed and reported : a Alphabetically b Oldest to Newest c Largest to Smallest d Order of Liquidity 9 Which of these is an "Expense" account on the Income Statement? a Accumulated depreciation b Depreciation c Equipment d Salvage Value 10 All of the following are True about “Depreciation expense” EXCEPT: a It is considered a "Contra Asset" b It is the gradual expensing of a fixed asset over its useful life c It may be computed evenly or accelerated in the early years d It is considered a "non-cash" expense 11) While all of the following are TRUE, which one is LEAST likely to help explain a difference between an entities reported Net Assets on their Balance sheet and the entities fair market valuation ? Book value of a building may be much less than its market value a b c d Net Assets are the accumulation of past reported Profits and not any future profits. The Market valuation of a company is on expected future profits. PP&E is reported at the acquisition cost less accumulated depreciation Net Assets do not reflect the potential for any future profit stream Net Assets do not reflect all intangible assets like reputation or Market share Liabilities and debts are reported at their current payoff value Net Assets do not reflect intangibles like value of reputation or the workforce or management. When you buy a company these intangibles impact market value. Liabilities are always reported at the value owed and therefore reflect the market valuation for debt. Assignment 1 Results Time Spent Range 1-14 hrs. Average 5.1 hrs. Last Class 90% Mean 90% Median 90% 6 5 4 3 2 1 0 A+ A Mastery A- B+ B Proficiency B- $1,000 and operational life > 1 year.
Step 1: Summarize what is Given:
Paid Dr. V
Other
Building
Land
Office equipment
Inventory
Good Will
Renovation
IT equipment
Advertising*
Total
Expenditures
salvage
Life
$850,000
$75,000
$24,000
$1,000
$50,000
$30,000
$15,000
$5,000
$85,000
25
$1,050,000
10
–
10
15
5
–
2.1) If this project is completed as planned, what is the total
amount of additional Assets to be recorded on the
Balance Sheet of MHS?
Typical Assets:
• Cash
Expenditures
salvage
Asset
PP&E Building
$850,000
$85,000
• AR
Asset PP&E Land
$75,000
• Inventory
Asset
PP&E Office equipment
$24,000
Asset
Inventory (Long Term)
$1,000
• Investments
Asset
Good Will
$50,000
• Assets
whose use is limited
Asset
PP&E Renovation
$30,000
Asset PP&E IT equipment
$15,000
• Property
Plant & Equipment
(PP&E)
Expense
Advertising*
$5,000
• Goodwill
Total
$1,050,000
Life
25
10
10
15
5
–
2.1) If this project is completed as planned, what is the total
amount of additional Assets to be recorded on the
Balance Sheet of MHS?
$1,045,000
Asset PP&E
Asset PP&E
Asset PP&E
Asset
Asset
Asset PP&E
Asset PP&E
Expense
Expenditures
salvage
Life
Building
Land
Office equipment
Inventory
Good Will
Renovation
IT equipment
Advertising*
$850,000
$75,000
$24,000
$1,000
$50,000
$30,000
$15,000
$5,000
$85,000
25
Total
$1,050,000
10
10
15
5
–
2.2) If this project is completed as planned, what is the total
amount of additional Gross Property, Plant and Equipment
to be recorded on the Balance Sheet of MHS?
$850,000+$75,000+$24,000+$30,000+$15,000=$994,000
Asset PP&E
Asset PP&E
Asset PP&E
Asset
Asset
Asset PP&E
Asset PP&E
Expense
Expenditures
salvage
Life
Building
Land
Office equipment
Inventory
Good Will
Renovation
IT equipment
Advertising*
$850,000
$75,000
$24,000
$1,000
$50,000
$30,000
$15,000
$5,000
$85,000
25
Total
$1,050,000
10
10
15
5
–
2.3) From the information provided, what is MHS’s total
required investment (expenditure) for this project?
Asset PP&E
Asset PP&E
Asset PP&E
Asset
Asset
Asset PP&E
Asset PP&E
Expense
Expenditures
salvage
Life
Building
Land
Office equipment
Inventory
Good Will
Renovation
IT equipment
Advertising*
$850,000
$75,000
$24,000
$1,000
$50,000
$30,000
$15,000
$5,000
$85,000
25
Total
$1,050,000
10
10
15
5
–
2.4) Calculate the first full years annual depreciation expense for
this project.
Depreciation = Acquisition cost – Salvage value
Useful Life
Asset PP&E
Asset PP&E
Asset PP&E
Asset
Asset
Asset PP&E
Asset PP&E
Expense
Expenditures
salvage
Life
Depreciation
Building
Land
Office equipment
Inventory
Good Will
Renovation
IT equipment
Advertising*
$850,000
$75,000
$24,000
$1,000
$50,000
$30,000
$15,000
$5,000
$85,000
25
$30,600
$2,400
$2,000
$3,000
–
Total
$1,050,000
10
–
10
15
5
–
$38,000
2.5) Calculate the Net Book Value of Total PP&E from this project
to appear on the Balance Sheet at the end of the third full year
of operation.
Book Value = Acquisition Cost – Accumulated Depreciation
Expenditures
salvage
Life
Depreciation
Building
Land
Office equipment
Renovation
IT equipment
$850,000
$75,000
$24,000
$30,000
$15,000
$85,000
25
$30,600
$2,400
$2,000
$3,000
Total
$994,000
10
15
5
$994,000 – ????? = NBV
$38,000
3 yr.
Accumulated
Depreciation
2.5) Calculate the Net Book Value of Total PP&E from this project
to appear on the Balance Sheet at the end of the third full year
of operation.
Book Value = Acquisition Cost – Accumulated Depreciation
$850,000+75,000+24,000+30,000+15,000-($38,000×3) = $880,000
3 yr.
Accumulated
Depreciation
Expenditures
salvage
Life
Depreciation
Building
Land
Office equipment
Renovation
IT equipment
$850,000
$75,000
$24,000
$30,000
$15,000
$85,000
25
$30,600
$2,400
$2,000
$3,000
$91,800
Total
$994,000
$38,000
$114,000
10
15
5
$994,000 – $114,000 = $880,000
$7,200
$6,000
$9,000
2.6) If the negotiated cost of the project changed and the
assigned life of various components were adjusted such that the
annual depreciation were to become $45,000, what would the
project’s Accumulated Depreciation be at the end of 5 full years
of operation?
$45,000 x 5 = $225,000
Expenditures
salvage
Life
Depreciation
5 yr.
Accumulated
Depreciation
Building
Land
Office equipment
Renovation
IT equipment
Total
$45,000 $225,000
2.7) If after 5 years, MHS wants to sell the building and move
the practice and equipment back to the hospital campus,
what would be the Fair Market Value price of the building at
that time? Explain your answer.
Market Value = Unknown ?
Whatever a willing
buyer and seller
agree to
11) With regard to financial reporting, which of the
following is the most challenging when it comes to the
Accounting concept of “Realization”?
X
a
Investment portfolio of Publicly traded stocks
b
c
d
e
Certificates of deposit
Equipment book Value
Accounts Receivable
Bank Debt
12) Revenue has what affect on the organizations Net Assets?
X
a
b
c
d
Increase
Decreases
No Impact
Depends upon the type of revenue
End Section 3
This is not the end … nor is it the
beginning of the end … but it is
the end of the beginning……
Baron Von-Farley
Exercise
See Excel Worksheet Tab 2
2-1
Adapted from: Academic Note “Another Implorable Occurrence,” W.T. Andrews, ACCOUNTING HORIZONS, Vol. 9-Np.3, April 1974, pp. 369-370. “Accounting
Text & Cases” R. Anthony, D. Hawkins, K. Merchant, McGraw-Hill Irwin.
Once upon a time many, many years ago, there lived a wise and kind feudal landlord in a small
province of Western Europe. The landlord, Baron Von-Farley, lived in a castle high on a hill
surrounded by fertile valleys and streams. The Baron was responsible for the well-being of many
peasants who occupied the lands surrounding his castle. Each spring as the snow began to melt; the
Baron would decide how to provide for all his peasants during the coming year.
One spring, the Baron was thinking about the wheat crop for the coming growing season. He
speculated that 30 acres of his land, being worth five bushels of wheat per acre, would produce
enough wheat for the following winter. The question he pondered was who should be selected to do
the farming? His chief advisor suggested Regina and Marc be selected. The Baron concurred and
dispatched runners to summon the two to the castle.
Upon arrival at the castle the two were led into the Baron’s chamber. “Marc, you will farm on the 20acre plot of ground and Regina you will farm the 10-acre plot,” proclaimed the Baron. “I will give Marc
20 bushels of wheat for seed and 20 pounds of fertilizer. (Twenty pounds of fertilizer are worth two
bushels of wheat.) Regina will get 10 bushels of wheat for seed and 10 pounds of fertilizer. I will give
each of you an ox to pull a plow, but you will have to make your own arrangements with Smitty the
plow-maker for a plow. The oxen, incidentally, are only three years old and have never been used for
farming, so they should have a good 10 years of farming ahead of them. Take good care of them
because an ox is worth 40 bushels of wheat. In the fall return to the castle with the oxen the plows,
and your harvest.”
Marc and Regina genuflected and withdrew from the Baron’s chamber, taking with them the things
provided by Baron Von-Farley.
The summer came and went, and after the harvest Marc and Regina returned to the castle to
account to the Baron for the things given in the spring.
Marc went first, “My Lord, I present you with a slightly used ox, a plow that is broken beyond
repair, and 203 bushels of wheat. From the harvest we owe Smitty the plow-maker three bushels
of wheat for the plow I got from him last spring. I used all the fertilizer and wheat you gave me for
seed.
Regina spoke next. “Here, my Lord is a partially used Ox, the plow, for which I gave Smitty the
plow-maker 3 bushels of wheat from my harvest, and 105 bushels of wheat. I too, used all my
seed and fertilizer last spring. I believe the plow may be good for two more seasons.”
“You both did well,” proclaimed Von-Farley. Blessed with this benediction, Marc and Regina
bowed and departed.
After they had taken their leave, the Baron began to contemplate what had happened.
Yes, they both did well he mused, “But I wonder which one did better?”
Questions:
For each Farm (Marc’s & Regina’s):
1) Record the Assets, Liabilities, Investment in Bushels
2) Update the value of Assets, Liabilities and Baron’s Investment as of
the end of the growing season.
3) Calculate the Profit or Loss for the season.
4) Was Marc or Regina a better farmer? Explain?
Baron Von Farley’s
Marc
Regina
Beginning Assets
Start
Start
20
10
Fertilizer (.10 bushel per lb.)
20 lbs
10 lbs
Ox (40 bushels per Ox)
1 Ox
1 Ox
Land (5 bushels per acre)
20 acres
10 acres
Wheat
0 bushels
0 bushels
Plow
0 plows
0 plows
0
0
Seed (bushels)
Obligations
Baron Von Farley’s
1) Record all values in “Bushels”
(Bushels)
Marc
Regina
Assets:
Start
Start
Seed (bushels)
20
10
Fertilizer (.10 bushel per lb.)
2
1
Ox (40 bushels per Ox)
40
40
Land (5 bushels per acre)
100
50
Wheat
0
0
Plow
0
0
Total Assets
162
101
0
0
Baron’s Investment
162
101
Profit or (Loss)
0
0
Total Equity
162
101
Total Equity & Liabilities
liabilities
162
101
Liabilities
Debt Obligations
Equity:
Baron Von Farley’s
2) Record the results of operations
Marc
(Bushels)
Assets
Regina
Start
Finish
Start
Finish
Seed (bushels)
20
0
10
0
Fertilizer (.10 bushel per lb.)
2
0
1
0
Ox (40 bushels per Ox)
40
36
40
36
Land (5 bushels per acre)
100
100
50
50
Wheat
0
203
0
105
Plow
0
0
0
2
Total Assets
162
339
101
193
0
3
0
0
Baron’s Investment
162
162
101
101
Profit or (Loss)
0
174
0
92
Total Equity
162
336
101
193
Total Liabilities & Equity
162
339
101
193
Liabilities
Debt Obligations
Equity
Baron Von Farley’s
3) Calculate the Profit or Loss for the season
Profit Calculation
Marc
Regina
203
108
Seed
20
10
Fertilizer
2
1
Ox usage
4
4
Plow usage
3
1
Total Expense
29
16
Profit or (Loss)
174
92
Bushels Produced
Expenses:
105
+3
4) Was Marc or Regina the better
Farmer?
Marc
Regina
Bushels Produced
203
108
Total Profit (bushels)
174
92
Bushels per acre
10.2
10.8
Profit per acre
8.7
9.2
Return on Investment
107%
91%
174/162
92/101
University of Miami
ACC 602
Section 4 Financial Statement Analysis
Section 4 – Roadmap
Financial Statement Analysis Tools
4.1) Ratio analysis
4.2) Benchmarks
4.3) Horizontal (Trend) analysis
4.4) Common Size Statements (Vertical analysis)
Why is learning how to read and
understand Financial Statements necessary?
▪ Enables better organizational management.
✓ Facilitates evaluation of options and decisions
✓ Aides strategic planning by helping to identify SWOT
▪ Helps avoid defaults by providing advance warning
▪ Enables the review and comparison of competitors.
▪ Enables the evaluation of an organization that we may
wish to work for, invest in, or extend credit to.
4.1) Ratio Analysis
GAAP does not define ratios
Multiple valid approaches and formulas
The Importance of Ratios
Ratios are important because they are so
widely used for financial analysis.
Credit Analysis
Strategic Planning
Investing
Financing Decisions
Benchmarking
Analyzing a company’s fiscal
performance is analogous to analyzing a
Patient’s Health Status.
When a patient sees a provider
what happens first?
ABCs
1) observe, 2) measure, 3) monitor
selected “Vital Signs”
Pulse
Respirations
Temperature
Blood pressure
O2 rate
Vital signs help focus attention
➢ Pulse of 90
➢ Respirations of 16
➢ Temperature of 97.9
➢ BP of 138/87
➢ O2 of 90
Good or Bad?
Good or Bad?
Good or Bad?
Good or Bad?
Good or Bad?
➢ High Blood pressure is problematic, but is a
low blood pressure better?
For people and organizations,
there are relevant ranges…
Results will very by the situation
from person to person
company to company or industry to industry.
The value of financial analysis, like vital signs, is
to draw attention to anomalies …
1) over time or 2) in comparison with others
Ratio Analysis
Is about focusing attention on the right issues
It is more about suggesting the right questions
than providing answers.
Ratio Analysis
➢ Results may be expressed as
▪ a decimal
0.3
▪ a percent %
30%
▪ a ratio
3:1
.3
= 30%
.03 = 3.0%
.003 = 0.3%
➢ Interpretation requires a reference point
(history, budget, peers)
➢ It is best done using several indicators
Ratio Comparisons
• Only useful between 2 values with a significant
relationship.
Current Assets & Current Liabilities
unlike
Long term debt & Utility Cost
• Finding the appropriate benchmark is critical.
− A higher value may be good or bad.
• Values of ratios compared across time are referred to as:
→ Longitudinal analysis, or Horizontal analysis.
Ratio Issues & Limitations
➢ Year end values or average for the year
➢ Year end values may be distorted or misleading.
➢ Different accounting methods may distort comparisons
(e.g. LIFO vs FIFO, Accelerated Depreciation)
➢ Formulas are not subject to GAAP
➢ Experience helps identify reasonable from unreasonable
Ratio Analysis Process
1) Select a meal
1) Select what is to be examined
2) Find the recipe
2) Find the ratio formula
3) Pull the ingredients
• Pantry
3) Find the numbers
•
Refrigerator
Balance Sheet
Income Statement
4) Mix, cook, bake
4) Do the math
5) Taste the results
• Good or Bad
5) Interpret the results
History or Benchmark
Typical Ratio Categories
The purpose of ratio analysis is to provide information
about the financial performance of an organization.
Ratios may be grouped into categories:
1. Growth
Q 4.4
2. Liquidity
3. Profitability
4. Activity / Efficiency
5. Capital structure
Different texts
and authors may
use different
groupings &
formulas
•
Growth ratios: what is the real year over year growth rate
•
Liquidity ratios: How well is the organization positioned
to meet its short-term obligations
• Profitability ratios: How profitable is the organization
Q 4.4
• Activity ratios: How
efficient is the organization in using
it’s resources
• Capital structure ratios: How are the organization’s assets
financed and how able is the organization to take on
additional debt?
Common Growth Rate Examples
➢ Patient Revenue (Top Line)
➢ Expenses
➢ Profit (Bottom Line)
➢ Total Assets
➢ Net Assets (Equity)
Growth Measures
1) Simple average annual growth =
((Latest Year / Base Year)-1) / n
2) Compound annual growth rate =
(1 / n)
(LY / BY)
-1
May be misleading due to an abnormally high or
low beginning or ending year.
n = number of years
Measuring Growth Rates
Base Year
Assets
Year 1
Year 2
Year 3
Year 4
Avg.
$500,000 $505,000 $535,600 $562,380 $602,000
Yr/Yr
1.00%
Simple Avg
=((602000/505000)-1)/4
5.100%
CAGR
=(602000 / 500000)^(1/4)-1
4.751%
In Excel:
6.06%
5.00%
7.05%
=(602000/500000)^(1/4)-1
Total Growth in Assets was [(602,000 / 500,000)-1] = 20.4%
Using the statements provided for Atlantic General Hospital
Co. (AGHC), compute the 2018 year over year top line
(before Bad Debts) growth in Patient Service Revenue.
(126,433,804 / 119,312,454) -1 = 5.97%
Statement of Operations
6%
ACC 602 Excel Worksheets
Exercises, Tab 7, Line 169, Q #1
Liquidity Measures
Provide evidence of a firm’s expected ability to meet
its short-term obligations. Particularly important to
creditors looking to assess the relative risk of lending
or outstanding debt.
Current Ratio
Quick Ratio
Acid Test
Days Cash on Hand
Liquidity Ratios
Is the organization maintaining the appropriate
amount of cash?
 Too little may risk default, vendor issues and
increased cost
 Too much may mean opportunity cost from lost
income and or unnecessary interest expense.
Liquidity Ratios
Current Ratio:
A measure of short-term debt-paying ability
Formula:
Current Ratio = current assets
current liabilities
Alternative Formula:
[Current Assets B.O.Y. + Current Assets E.O.Y] / 2
[Current Liabilities B.O.Y. + Current Liabilities E.O.Y] / 2
Current Ratio
Some analyst expect a ratio of 2 (or 2:1)
$2 of Current Assets for every $1 of Current Liabilities
Formula:
Current Ratio = current assets
current liabilities
Caution: use
“Current Assets”
and NOT
“Total Assets”
If 2:1 is Good Current Ratio…is 10:1 better?
Current Ratio = current assets
current liabilities
If the average person carried $50 cash in their wallet/purse
Would someone carrying $5,000 be better or worse?
$5,000 is > $50
that makes it much better ….. But
It could be invested earning a return (i.e. Interest income)
So in this case …
more is better than less …
but may not be good …
Current Ratio:
What may be causing a greater 10:1 Current Ratio?
Excess idle cash?
Slow collections of AR?
Too much Inventory?
Paying invoices too quickly?
Formula:
Current
= current
assetsanswer
The ratio
flagsRatio
the anomaly,
but doesn’t
current
What or
Whyliabilities
Process to calculate the AGHC 6/30/18 Current Ratio
1) Find the Formula: Current Assets / Current Liabilities
2) Find the Financial Statement & respective values
AGHC Balance Sheet
NOT this
Calculate the AGHC 6/30/18 Current Ratio
1) Formula:
Current Assets / Current Liabilities
2) Find the values on the Financial Statements
3) Do the Math
Total Current Assets
36,564,889
Total Current Liabilities 16,205,302
= 2.26
How do you read (interpret) the answer?
(36,564,889 / 16,205,302) = 2.26
Current Assets
Current Liabilities
For every $1 dollar of current liabilities,
there are $2.26 of current assets
Is the AGHC value for 2018 stronger or
weaker than in 2017?
CR = Current Assets / Current Liabilities
Current Ratio
2018 = 2.26
2017 =
ACC 602 Excel Worksheets Exercises, Tab 7 AGHC #2 (Line 175)
Is the AGHC value for 2018 stronger or
weaker than in 2017?
CR = Current Assets / Current Liabilities
Current Ratio
2018 = 2.26
2017 = 2.43
(36,836,424 / 15,151,534) = 2.43
2.26 < 2.43 The 2018 value is a weaker than in 2017 ACC 602 Excel Worksheets Exercises, Tab 7 AGHC #2 (Line 175) If the Current Ratio benchmark for similar size hospital’s is 2.05 is AGHC stronger or weaker ? CR = Current Assets / Current Liabilities Current Ratio: AGHC Benchmark 2.26 2.05 AGHC is a Stronger CR = Current Assets / Current Liabilities 2016 MCR* Current Ratio 10th 0.67 All US Hospitals 25th Median 75th 1.22 2.05 3.16 2.26 Mean …… Average Median …. Half above and half below Mode …… Most common * Source: Medicare Cost reports 90th 4.73 Common Convention Current Ratio: AGHC Benchmark 2.26 2.05 Report your answer in the same format & with the same number of decimal places as the benchmark When Benchmark quartile data exist … A value above 25% and below 75% (middle quartiles) … Is considered simply Stronger or Weaker A value that is less than 25% or above 75% (1st and 4th Quartiles) May be considered “Much” Greater or “Much” Lower Median Q2 Q3 Q1 10% 25% Q4 75% 90% Liquidity Ratios Quick Ratio — A more severe test of short-term debt-paying ability Formula: Quick Ratio= (Cash & ST investments* + Net Receivables) Current Liabilities Acid-test Ratio — The most severe test of short-term debt-paying ability Formula: Acid-test Ratio = (Cash & ST investments) Current Liabilities If the Acid-test benchmark value is .50 How does the 2018 AGHC value compare? AGHC is Stronger 1.11 > 0.50
(9,210,003 + 8,801,622)
16,205,302
= 1.11
(Cash & ST Investments)
Current Liabilities
ACC 602 Excel Worksheets Exercises,
Tab 7 AGHC #3 (Line 181)
Liquidity Ratios
Days Cash on Hand (DCoH) — Indicates cash on hand
in relation to the average daily Cash operating
expenses.
Formula Options:
Balance sheet
Statement of Operations
1) Short Term (ST):
cash / (cash expenses per day)
2) Cash All Sources:
CAUTION: older
Textbooks may remove
Bad Debts from
Expenses
(cash + investments*) / (cash expenses per day)
* Unrestricted short term and long term investments that can be liquidated quickly & easily
DCoH (ST) = cash / (cash expenses per day)
AGHC Balance Sheet
June 30, 2018
$9,210,003
(cash exp. / day)
Denominator “Cash expenses per day”?
(Total operating expenses – depreciation – amortization)
Number of calendar days*
AGHC Statement of Operations
Year ended June 30, 2018
Cash Expenses:
127,458,282
– 6,852,427
22,248
120,583,607
Cash Expenses / day:
120,583,607
365*
= $330,366
*360, 365, 366
AGHC 2018 days cash on hand (ST)
Days Cash on Hand (short-term):
= Cash / Cash Expenses per day
9,210,003 / 330,366 = 27.9 days
Note:
answer is in Days
and NOT dollars
If the organization stopped collecting payments, they could continue
to operate and pay expenses for the next 27.9 days
Is 28 days a Good or Bad number?
AGHC 2018 days cash on hand (ST)
Days Cash on Hand (short-term):
= Cash / Cash Expenses per day
9,210,003 / 330,366 = 27.9 days
Note:
answer is in Days
and NOT dollars
AGHC is modestly Stronger at 27.9 days
2016 MCR*
DCoH (ST)
10th
4 hours
All US Hospitals
25th Median 75th
0.8
16.6
55.9
90th
113.9
AGHC 2018 days cash on hand (ST)
Days Cash on Hand (short-term):
= Cash / Cash Expenses per day
9,210,003 / 330,366 = 27.9 days
Note:
answer is in Days
and NOT dollars
Is 113.9 a better number?
2016 MCR*
DCoH (ST)
10th
4 hours
All US Hospitals
25th Median 75th
0.8
16.6
55.9
90th
113.9
Days Cash on Hand (All Sources)
= (cash + investments*) / (cash expenses per day)
?
• Short Term & long Term Investments
• Securities that are easily converted into CASH
Days Cash on Hand (All):
= (cash + investments*) / (cash expenses per day)
Review Footnotes to Include:
▪ Investments (Stocks & Bonds)
▪ Board Designated investments
▪ Unrestricted investments
▪ Internally designated investments
Words matter
Review Footnotes to Exclude:
▪ Donor restricted investments or endowments
▪ Joint venture investment
▪ Partnership investments
▪ Investment in Subsidiaries
▪ Funds held by Trustee or in escrow
▪ Other assets or “other investments”?
Watch for “Assets whose Use is Limited”
▪ May be included or excluded (see footnotes)
Compute AGHC’s 2018 days cash on hand (All)
Days Cash on Hand (All):
= (cash + investments*) / (cash expenses per day)
= (9,210,003 + investments*) / (330,366)
?
* Short Term & long Term
ACC 602 Excel Worksheets Exercises, Tab 7, Q #4 (Line 187)
What is included in “Cash & Investments” (All)
AGHC Balance Sheet
June 30, 2018
9,210,003
8,801,622
209,252
3,584,398
27,696
21,832,971
Not These
Judgement
AGHC’s 2018 days cash on hand (all sources)
Days Cash on Hand (All):
= (cash + investments*) / (cash expenses per day)
9,210,003+8,801,622+209,252+3,584,398+27,696
330,366
DCoH (All) = 66.1 days
2016 MCR*
DCoH (All)
10th
7 hours
All US Hospitals
25th Median 75th
3.3
38.9
123.5
90th
218.7
AGHC is Modestly Stronger at 66.1 days
* Short Term & long Term
How can an entity improve their Liquidity position?
Primarily: Working Capital (CA-CL) Management
I) Revenue Cycle Activities
Mgmt. Focus {Dashboards & Benchmarking}
Resource allocation billing/collection
Payment Policies (i.e. Incentives & time of service)
Payer Contract terms
Charge capture, price setting, documentation, coding, denial management
II) Treasury Activities – Cash Management
Payables management (timing)
Asset Allocation of Investments
Capital Debt structure (mix of ST & LT Debt Financing)
III) Operating Activities – Expense Management
Supply Chain management, purchasing, pricing, GPO contracts
Staffing levels (productivity)
Wages, OT & benefits
Amount of Travelers, Locums
Contract Review and management
Defer Capital spending PP&E
Compute the Days Cash
on Hand (ALL)?
?
?
Cash & Investments
Cash Expenses per day
ACC 602 Excel
Worksheets Exercises,
Tab 7, Line 193, Q #5
Compute the Days Cash
on Hand (ALL)?
Cash & Investments
Cash Expenses per day
$ 2,766,000
$187,452,000
$190,218,000
Compute the Days Cash
on Hand (ALL)?
Cash & Investments
Cash Expenses per day
$296,552 – $12,920
365
=$777,074
$190,218 = 245
$777.1
Profitability Measures
Provide evidence of the firm’s ability to generate a
profit and the degree of that profit. These are
valuable indicators for Governance, would be
investors, and creditors.
➢ Operating Margin
➢ Total Margin
➢ Return on Assets
➢ Return on Net Assets
➢ EBIDA to Revenue
Profitability Ratios
Operating Margin (typically expressed as a %) Represents the
operating profit earned on each dollar of operating revenue. A
multi-purpose measure, used for many managerial purposes &
credit analysis.
Statement of Operations
Formula:
operating margin =
operating income (loss)
total operating revenues
Total Operating Revenue = Net Patient Service Revenue less bad debts + Other Operating Revenue
Calculate AGHC’s 2018 Operating Margin
Operating Margin = Operating Profit / Operating Revenue
Statement of Operations
-2,444,659
125,013,623
Operating Margin = -2.0%
ACC 602 Excel Worksheets
Exercises, Tab 7, Q #6 Line 224
Read and interpret the Operating Margin…
-2,444,659
125,013,623
may be expressed as (2,444,659)
125,013,623
Operating Margin = -2.0%
For every $1 dollar of operating revenue,
AGHC incurred $1.02 in operating expenses
AGHC spent $1.02 to generate $1.00 of Revenue
Operating Margin:
= Operating Profit / Operating Revenue
Operating Margin = Operating Profit / Operating Revenue
2016 MCR*
10th
Operating Margin -6.6%
All US Hospitals
25th Median 75th
-1.8% 3.1%
8.2%
90th
13.3%
AGHC is Much Weaker at -2.0%
* Source: Medicare Cost reports
Profitability Ratios
Total Margin — Bottom line Profit as a percent of total
operating revenue & other income
Formula:
Excess or Revenue over Expense
(total operating revenue + other Income*)
Patient & Other operating
non-operating
* Other Income = nonoperating income = nonoperating revenue
Calculate AGHC’s 2018 Total Margin
Statement of Operations
Total Operating Revenue =
Patient revenue + Other operating revenue
1,101,234
(125,013,623 + 3,545,893)
Total Margin =
0.9%
“nonoperating income” is typically
found just before the …
“excess of revenue over expense”
aka “Excess of Revenue over Expense”
Total Margin =
Excess of Revenue over Expense
Total Operating Revenue + Other Income
ACC 602 Excel Worksheets
Exercises, Tab 7, Line 231
Read and interpret the Total Margin value…
1,101,234
(125,013,623 + 3,545,893) =
Total Margin = 0.9%
For every $1 dollar of Total Revenue & Other Income,
AGHC incurred just over $0.99 cents in expenses
and earned just under $.01 in profit
AGHC spent nearly $0.99 cents to generate a dollar of Revenue
Total Margin:
Excess of Revenue over Expense
Total Operating Revenue + Other Income
Total Margin =
2016 MCR*
Total Margin
Excess or Revenue over Expense
(total operating revenue + other income)
10th
-5.8%
All US Hospitals
25th Median 75th
-1.1% 3.7%
8.8%
90th
14.1%
AGHC is Weaker at 0.9% than the Median
* Source: Medicare Cost reports
Profitability Ratios
Return on total assets (often expressed as a %)
Represents the yield received in relation to total assets.
A common measure of performance.
Statement of Operations
Balance Sheet
Formula:
ROA = excess of revenue over expense
total assets
Calculate AGHC’s 2018 Return on Total Assets
Statement of Operations
Balance Sheet
1,101,234
111,559,305
ROA = 1.0%
Return on Assets:
Excess of Revenue over Expense
Total Assets
ACC 602 Excel Worksheets
Exercises, Tab 7 Line 239
ROA =
Excess or Revenue over Expense
Total Assets
1,101,234
111,559,305
ROA = 1.0%
For every $1 in Assets, AGHC generated
$0.01 in Profit
* Source: Medicare Cost reports
ROA =
2016 MCR*
ROA
Excess or Revenue over Expense
Total Assets
10th
All US Hospitals
25th Median 75th
-7.1% -1.1%
3.5%
8.6%
AGHC is Weaker at 1.0%
* Source: Medicare Cost reports
90th
16.6%
Profitability Ratios
Return on Equity (ROE)
[aka Net Assets]
[Often expressed as a %] Represents the profit generated in
relation to the amount of Net Assets of the organization.
NOT to be
confused with
“Total Assets”
Formula:
ROE = excess of revenue over expense
Total Net Assets
Calculate AGHC’s 2018 Return on Net Assets
Balance Sheet
1,101,234
56,611,070
ROE = 1.9%
Return on Net Assets:
Excess of Revenue over Expense
Total Net Assets
ACC 602 Excel Worksheets
Exercises, Tab 7 Line #247
ROE* =
2016 MCR*
ROE
Excess or Revenue over Expense
Total NET Assets
10th
All US Hospitals
25th Median 75th
-10.7% 0.1%
7.3%
90th
16.6% 34.1%
AGHC is Weaker at 1.9%
* Source: Medicare Cost reports
* ROE = Return on Equity = Return on Net Assets
Financial Performance Measures (ROE)
Return on Net Assets is critical because:
1. It enables long-term growth and survival
2. It enhances the value of the firm
(Economic Value Added)
Which Profit is better ($75k or $45k)?
Owners Equity
1) $1,000,000
2) $ 500,000
Profit
$75,000
$45,000
ROE
7.5%
9.0%
Profitability Ratios
EBIDA* to Revenue – defines the percentage of total revenue
that has been realized in the form of excess revenues over expenses,
plus depreciation & amortization and interest expenses. EBIDA is a
measure of performance that is widely used in business valuation
Formula:
excess of revenue over expense + Interest + Depreciation + Amortization
(Operating Revenue + Other Income**)
Patient & Other
Nonoperating Income
* EBIDA: earnings before Interest, depreciation & amortization
EBITDA: earnings before Interest, taxes, depreciation & amortization
** Other Income = nonoperating revenue = nonoperating income = nonoperating gains
Calculate AGHC’s 2018 EBIDA to Revenue
Statement of Operations
ACC 602 Excel Worksheets
Exercises, Tab 7 Line #256
(1,101,234 +1,169,556 + 6,852,427 + 22,248)
(125,013,623 + 3,545,893)
EBIDA =
0.071
or
7.1%
EBIDA to Revenue:
Excess of Revenue over Expense + Interest + Deprec. + Amort.
Total Operating Revenue + Other Income
EBIDA to Revenue =
Excess of revenue over expense + Interest + Depreciation + Amortization
Total Operating Revenue + Other Income
All US Hospitals
2016 MCR*
EBIDA to
Revenue
10th
25th Median 75th
90th
-0.2%
1.4%
8.6%
3.2%
5.7%
AGHC is Much Stronger at 7.1%
* Source: Medicare Cost reports
How can an entity improve their profitability?
Primarily: Lower the cost to produce a dollar of Revenue
I) Revenue Cycle Activities – Revenue Growth from same & new volume
Service Mix & Volume (Stars & Cows)
Market Share
Charge capture, pricing, documentation, coding, denials
Payer Contract Rates
Grants & Gifts
II) Operations Activities – Expense Management
Supply Chain, purchasing, pricing, GPO contracts, Value Analysis
Staffing levels, productivity and FTE management
Wages, OT & benefits
Amount of Travelers, Locums
Contract Review, bidding, approval process
Self Insurance (deductibles & risk mgmt.)
III) Capital management activities
Defer Capital spending PP&E ????
Asset Allocation
Debt structure & Financing
Activity Measures
▪ Examines how efficiently Management is using its resources
▪ Utilizes values from both the Balance Sheet and
the Statement of Operations.
➢ Total asset turnover
➢ Fixed asset turnover
➢ Inventory turnover
➢ Days in AR
➢ Average payment period
➢ Average age of plant
Activity Ratios
Asset Turnover — Represents the average amount of
Operating Revenue generated from each dollar of deployed
assets. Senior Management is responsible for asset allocation
decisions.
How much Operating Revenue is generated for every $1 of Assets
Formula:
Asset Turnover = Total Operating Revenue
Total Assets
Asset Turnover = Total Operating Revenue
Total Assets
2016 MCR*
Total Asset
Turnover
10th
All US Hospitals
25th Median 75th
90th
0.60
0.78
2.09
1.11
1.58
Why might Hospitals with large investment balances
produce lower asset turnover ratios
* Source: Medicare Cost reports
Activity Ratios
Fixed Asset Turnover — Represents the average
amount of Operating Revenue generated from each dollar
invested in net property, plant, and equipment (PP&E).
Low values may reflect excess capacity or underutilized PP&E
Formula:
Fixed Asset Turnover = Total Operating Revenue
Net PP&E
Calculate AGHC’s 2018 Fixed Asset Turnover Ratio
Statement of Operations
125,013,623
61,665,021
Balance Sheet
Fixed Asst Turnover
= 2.03
ACC 602 Excel Worksheets
Exercises, Tab 7 Line #264
Fixed Asset Turnover = Total Operating Revenue / Net PP&E
Read & interpret the Fixed Asset Turnover value
Fixed Asset Turnover = 2.03
For every $1 of investment in PP&E
They generated $2.03 of Operating Revenue
2016 MCR*
Fixed Asset
Turnover
10th
All US Hospitals
25th Median 75th
90th
1.36
1.82
5.56
Fixed Asset Turnover:
Total Operating Revenue / Net PP&E
2.55
3.74
If the benchmark for FA Turnover is
2.55, is AGHC better or worse ?
FA Turnover = Operating Revenue / Net PP&E
AGHC FA turnover
Benchmark
2.03
2.55
AGHC is Weaker in generating Revenue for
every dollar they have invested in fixed assets
Note: some ratios use “average PP&E”
[(PP&E BB + EB ) / 2]
FA Turnover = Operating Revenue / Net PP&E
AGHC FA turnover
Benchmark
2.03
2.55
What factors may explain the weaker ratio results?
Lower Revenue:
✓ Payer Mix
✓ O/p Volume
✓ Occupancy %
✓ Acuity
✓ Product lines
Greater PP&E:
✓ Newer PP&E
✓ Excess Capacity
✓ Asset redundancy
✓ High end PP&E
✓ Computerization
Activity Ratios
Inventory Turnover – defines the number of revenue
dollars generated per dollar of inventory. Hospital
typically strive to operate with the lowest level of
inventory necessary to provide uninterrupted service.
How did this work out during the pandemic?
Formula:
Inventory Turnover = Total Operating Revenue
Inventory
Inventory Turnover = Total Operating Revenue
Inventory
2016 MCR*
Inventory
Turnover
* Source: Medicare Cost reports
10th
All US Hospitals
25th Median 75th
90th
32.87
41.09
95.67
53.81
71.85
Note: some ratios use “average inventory”
[(inventory BB + EB ) / 2]
Activity Ratios
Number of Days in Receivables — Represents
number of operating days in receivables (a measure of
worth as well as performance).
Revenue cycle efficiency is typically correlated with fewer
days in A/R.
Formula:
Days in A/R =
net patient accounts receivables
net patient service revenue per day
Number of Days in Accounts Receivable (AR)
Balance Sheet
Net of allowances &
Bad Debts
Statement of Operations
Patient Revenue*
Less Bad Debts
(Net Patient AR) / (Net Patient Revenue per day)
Annual Net Patient Revenue
365**
* Patient revenue and NOT other revenue
** 360, 365, 366
Calculate AGHC’s 2018 days in AR
Balance Sheet
11,039,161
(121,264,120 / 365)
Statement of Operations
Average
Days in AR
= 33.2 days
ACC 602 Excel Worksheets
Exercises, Tab 7 line #271
Days in AR = (Net Patient AR) / (Net Patient Revenue per day)
If the benchmark for days in AR was 56
is AGHC better or worse ?
Days in AR = Net AR / Net Patient revenue per day
Days in AR
Benchmark
33
56
AGHC is Much Better*
Days in AR = Net AR / Net Patient revenue per day
All US Hospitals
2016 MCR*
Days in AR
* Source: Medicare Cost reports
10th
25th Median 75th
90th
40.0
46.5
91.0
55.6
70.4
Note: some ratios use “average AR”
[(BB + EB ) / 2]
Days in AR = Net AR / Net Patient revenue per day
Days in AR
Benchmark
33
56
AGHC is Much Better*
What might explain the difference?
Lower AR:
✓ Efficient Revenue cycle
✓ More Bad Debts or Charity
✓ Faster removal of old accounts
✓ Favorable Payer Mix
Activity Ratios
Average payment period — A measure of the
average number of days it takes an organization to pay
its bills.
Formula:
Payment period =
Total current liabilities
cash expenses per day
Avg Payment period = Current Liabilities / Cash expenses per day
2016 MCR*
Avg Payment
period
10th
All US Hospitals
25th Median 75th
90th
26.6
37.2
124.7
53.4
76.0
Managing Average days in AR and
Average Payment period
* Source: Medicare Cost reports
Note: some ratios use “average CL”
[(BB + EB ) / 2]
Activity Ratios
Average age of plant — Represents the average age
of the organization’s property plant and equipment (Must be a
positive number)
The “CPR” of ratios
Formula:
Age of plant = Accumulated Depreciation
Depreciation Expense
Avg Age of PP&E:
Accumulated Depreciation / Depreciation Expense
High values may indicate a pending need
for significant capital reinvestment.
Balance Sheet
or footnotes
Statement of
Operations
Accumulated Depreciation
Depreciation Expense
Calculate AGHC’s 2018 Average Age of
Property Plant & Equipment (PP&E)
Footnotes:
Absolute value
Statement of Operations
70,514,829
6,852,427
Avg. Age of PP&E
= 10.3 years
Avg Age of PP&E =
Accumulated Depreciation
Depreciation Expense
ACC 602 Excel Worksheets
Exercises, Tab 7 Line #279
Is AGHC Average Age of PP&E, stronger or weaker?
AGHC
Benchmark
10.3 years
11.4 years
1.3 years better (Stronger)
with younger average age of PP&E
All US Hospitals
2016 MCR*
10th
25th
Median
75th
90th
Avg Age of PP&E
3.6
7.4
11.4
15.7
20.8
Avg Age of PP&E:
Accumulated Depreciation / Depreciation Expense
How can an entity improve their Activity Ratios?
Primarily: Amount & type of assets:
I) Revenue generated per $ of Asset:
Asset efficiency ..
& productivity
Right amount at
the Right time
Sharing assets (i.e. Shifts)
Eliminating idle or underutilized asset
Increase Revenue generation within current footprint
Site Consolidation
Greater Outpatient focus (lower cost per foot)
Target placement of services (payer Mix & volume)
Greater Just in Time inventory, use of consignment
Efficient AR collection
Equipment management, prioritization & shorter useful life
II) Supply Chain management of Inventory levels
III) Revenue Cycle Focus on AR Balances and aging
Capital Structure Measures
Risk associated with the amount of long-term debt and the
ability to meet debt repayment schedules.
➢Total Debt to Equity
➢ Total Debt to Total Assets
➢ Long Term Debt to Assets
➢ Times interest earned Ratio
➢ Debt Service Coverage Ratio
Liquidity measures short term….
Capital Structure measures focus on long term
Capital Structure Ratios
Debt to Equity — Represents the proportion of total
Liabilities to Net Assets. The greater the ratio the greater the
firms debt leverage. The greater the leverage the greater the
burden of debt repayment and risk of failure.
Formula:
Debt to Equity = Total Liabilities
Total Net Assets
Calculate AGHC’s 2018 Debt to Equity Ratio
54,948,235
56,611,070
Debt to Equity
= .97
ACC 602 Excel Worksheets
Exercises, Tab 7 Line #287
Debt to Equity: Total Liabilities / Total Net Assets
Read & interpret the debt to equity value
54,948,235
56,611,070
Debt to Equity = .97
Assets are financed by a combination of Debt and Equity.
For every $1 of Equity …. AGHC has $0.97 of debt
Debt to Equity:
Total Liabilities / Total Net Assets
Debt to Equity:
Total Liabilities / Net Assets
All US Hospitals
2016 MCR*
Debt to Net
Assets
10th
25th Median 75th
90th
15.7
2.1
0.1
0.8
0.3
AGHC is Weaker at .97
* Source: Medicare Cost reports
Note: some ratios use “average TL and NA”
[(BB + EB ) / 2]
Capital Structure Ratios
Debt to Assets — Represents the proportion of total Assets
financed with debt. The greater the debt the greater the firm’s
risk and ability to borrow additional funds.
Formula:
Debt to Assets = Total Liabilities
Total Assets
Calculate AGHC’s 2018 Debt to Asset Ratio
54,948,235
111,559,305
Debt to Asset
= .49
ACC 602 Excel Worksheets
Exercises, Tab 7 Line #295
Debt to Assets = Total Liabilities / Total Assets
Interpret AGHC’s 2018 Debt to Asset Ratio
54,948,235
111,559,305
Debt to Asset
= .49
49% of the assets are financed with debt
Higher the % … the greater the “Leverage”
Higher the % … the greater the “Risk”
Higher the % … less likely to be able to borrow more
Debt to Asset ratio = Total Liabilities / Total Assets
Debt to Assets = Total Liabilities / Total Assets
All US Hospitals
2016 MCR*
10th
25th
Median
75th
90th
Debt to Assets
0.94
0.67
0.44
0.25
0.10
AGHC is Weaker at .49
* Source: Medicare Cost reports
If the Median value for Total Debt to Asset Ratio is 0.44
What % of Total Assets are financed with Equity (net Assets)?
2016 MCR*
Debt to Assets
10th
0.94
All US Hospitals
25th
Median
75th
0.67
0.44
0.25
90th
0.10
Assets = Liabilities + Equity
So the Equity to Assets must be .56 (56%)
Assets
Liabilities
Equity
$100
$ 44
$ 56
Debt to Assets = 44 / 100 = .44
Equity to Assets = 56 / 100 = .56
Capital Structure Ratios
Long Term Debt to Assets — Represents the
proportion of total Assets financed with Long Term Debt.
The greater the debt the greater the firm’s risk and ability to
borrow additional funds.
Numerator may be either just debt labeled “Long Term” or
All Long Term debt as shown below.
Formula:
LT Debt to Assets = Total Liabilities – Current Liabilities
Total Assets
Alternatives: Just Interest bearing Debt
Capital Structure Ratios
Times Interest Earned Ratio — Reveals to creditors
and potential lenders the organizations ability to generate
cash flow to make interest payments on debt.
Formula:
Times interest earned =
(Excess of Revenue over Expense + Interest Exp.)
Interest Expense
Capital Structure Ratios
Debt Service Coverage Ratio (DSCR) —
Represents the organizations ability to make debt payments by
indicating the number of dollars of cash flow generated for
each dollar of debt service owed.
(this ratio is heavily used in credit analysis).
Formula:
DSCR =
(Exc. of Rev. over Exp. + Interest Exp. + Deprec. Exp.)
annual Debt Service*
* Debt Service = Principal and Interest
DSCR =
(Exc. of Rev. over Exp. + Interest Exp. + Deprec. Exp.)
annual Debt Service*
Do creditors prefer to see a bigger or a smaller
DSC Ratio?
Greater the DSCR … the less the Risk
* Debt Service = Principal and Interest
Standard Expense relationships
What are the Wages as a % of Total Expense:
Total wages / Total expense
What is the value for AGHC?
55,361,163
127,458,282
= .43
ACC 602 Excel Worksheets
Exercises, Tab 7 Line #302
Wages as a % of Total Expense:
Total wages / Total expense
How does AGHC compare with other hospitals?
55,361,163
= .43
127,458,282
All US Hospitals
2016 MCR*
Salary & Wage / Exp.
10th
25th
Median
75th
90th
29.9%
33.5%
38.1%
42.8%
46.4%
What might account for this?
Higher Wages (check Medicare WEF)
More skilled mix (RNs vs Aides)
More employed Physicians
No o/s service workers
What is the value for AGHC?
Capital Cost as a % of Total Expense:
(Interest + Depreciation + amortization) / Total Expense
8,044,231
127,458,282
= 6.3%
1,169,556
6,852,427
22,248
8,044,231
ACC 602 Excel Worksheets
Exercises, Tab 7 Line #309
Capital Cost as a % of Total Expense:
(Interest + Depreciation) / Total Expense
How does AGHC compare with other hospitals?
8,044,231
127,458,282
= 6.3%
All US Hospitals
2016 MCR*
10th
25th
Median
75th
90th
Capital Expense
2.8%
4.0%
5.6%
7.4%
9.5%
What drives this ?
More Debt (higher rates)
Newer Fixed Assets (PP&E)
Lower Wages
There is a single composite indicator of
financial strength
Sometimes referred to as Financial Viability.
Financial Viability is measured by the
Financial Strength Index (FSI)
Financial
Position
Financial strength is a short-term measure of aQ1:
firm’s
ability
to
withstand financial shock and or to capitalize on opportunities
Four Dimensions of Financial Strength
Profits
Cash &
Investments
Debt
Position
Age of Physical
Facilities
Total Margin
Days Cash
on Hand (All)
Debt / Assets
Avg Age PP&E
Cleverly & Associates
Financial Strength Index
Financial Strength Targets:
1. Total Margin
2. DCoH (all)
3. Debt to Assets
4. Avg. Age of PP&E
> .04 or 4%
> 120 days
< .50 or 50% < 9.0 years Financial Strength Index Values Composite FSI score* Excellent > 3.0
Good
0.0 to 3.0
Fair
-2.0 to 0.0
Poor
< -2.0 * Values are US Hospital industry specific Financial Strength Index use 2 decimal places Financial Strength Formula: (Total Margin – .04) / .04 = 2. (Days Cash (all) – 120) /120= 3. (.50 – Debt/Assets) / .50 = 4. (9.0 - Age of PP&E) / 9.0 = 1. FSI = Composite score Excellent >3
Good
0 to 3
Fair
-2 to 0
Poor
< -2 Plus Plus Plus Equals Calculate the AGHC’s FSI for 2018 Financial Strength Formula: 1. (Total Margin – .04) / .04 = -.75 2. (Days Cash (all) – 120) /120 = Plus 3. (.50 – Debt/Assets) / .50 = Plus 4. (9.0 - Age of PP&E) / 9.0 = Plus FSI = Equals Total Margin 1,101,234 / (125,013,623+3,545,893) = .01 Rounded to 2 decimal places [(.01 - .04) / .04] = -.75 ACC 602 Excel Worksheets Exercises, Tab 7 Line #316 Calculate the AGHC’s FSI for 2018 Financial Strength Formula: 1. (Total Margin – .04) / .04 = -.75 2. (Days Cash (all) – 120) /120 = -.45 Plus 3. (.50 – Debt/Assets) / .50 = Plus 4. (9.0 - Age of PP&E) / 9.0 = Plus FSI = Equals DCoH (all) (9,210,003+8,801,622+209,252+3,584,398) = 21,805,275 21,805,275 / [(127,458,282 - 6,852,427 – 22,248) / 365] = 66 (66 - 120) / 120] = -.45 Calculate the AGHC’s FSI for 2018 Financial Strength Formula: 1. (Total Margin – .04) / .04 = -.75 2. (Days Cash (all) – 120) /120 = -.45 Plus 3. (.50 – Debt/Asset) / .50 = .02 Plus 4. (9.0 - Age of PP&E) / 9.0 = FSI = Debt to Assets 54,948,235 / 111,559,305 = .49 (.50 - .49) / .50] = .02 Plus Equals Calculate the AGHC’s FSI for 2018 Financial Strength Formula: 1. (Total Margin – .04) / .04 = -.75 2. (Days Cash (all) – 120) /120 = -.45 Plus 3. (.50 – Debt/Asset) / .50 = .02 Plus 4. (9.0 - Age of PP&E) / 9.0 = -.14 Plus -1.32 Equals FSI = Age of PP&E 70,514,829 / 6,852,427 = 10.29 (9.0 – 10.29) / 9.0] = -.14 Calculate the AGHC’s FSI for 2018 Financial Strength Formula: 1. (Total Margin – .04) / .04 = -.75 2. (Days Cash (all) – 120) /120 = -.45 Plus 3. (.50 – Debt/Asset) / .50 = .02 Plus 4. (9.0 - Age of PP&E) / 9.0 = -.14 Plus -1.32 Equals Composite score Excellent >3
Good
0-3
Fair
-2 to 0
Poor
< -2 FSI = What is the Weakest Item? Financial Strength Formula: 1. (Total Margin – .04) / .04 = -.75 2. (Days Cash (all) – 120) /120 = -.45 Plus 3. (.50 – Debt/Asset) / .50 = .02 Plus 4. (9.0 - Age of PP&E) / 9.0 = -.14 Plus -1.32 Equals FSI = Ratio Analysis Summary 1. Select the ratio to be analyzed 2. Find the ratio formula 3. Find the Financial Statement with the selected values 4. Do the math and calculate the ratio 5. Record the answer in the format used in the benchmark Rounding (whole number, Decimal, or %) 6. Interpret the results Versus History or Benchmark or Peers 4.2) Benchmarks The Challenge of Selecting a Benchmark Standard Whether an industry benchmark is, or is not appropriate depends upon: Q 4.4similarity to the organization; 1) Comparison group’s 2) The goals of the organization; 4) Data reliability with a sample size. 5) Using the same ratio definitions used by the benchmark organization. “I don’t have to outrun the bear, I just have to outrun you” Benchmark Options Multiple Published benchmarks: 1) Bed size 2) Revenue size 3) Urban or Rural 4) Teaching / Non teaching 5) Specific State or Region 6) Rating agency averages 7) Custom peer analysis 8) Median or specified Quartile Would this database have any bias? Ratio results can be presented effectively in either Tabular or Graphical form Exhibit 4-5 Newport Hospital Ratios for 20X0 and 20X1, and HCIA & HCFA Median Ratio Values Standard Small Hospitals' HCIA & HCFA Median Ratio[1] Desired Position 2.18 1.76 0.35 67 46 54 Above Above Above Below Above Below 1.80 1.36 0.26 52 13 49 0.58 0.46 0.05 48 6 133 Below Below Below Below Below Below Increasing Liquidit Increasing conside Increasing cash a Increasing accoun Increasing hand is Decreasing period Profitability Ratios Operating Margin Non-Operating Revenue[2] Return on Total Assets Return on Equity Net Assets[2] 0.02 0.05 0.03 0.06 Above Varies Above Above 0.03 0.02 0.05 0.20 0.10 0.02 0.11 0.64 Above Below Above Above Decreasing At or a Increasing profitab Decreasing drop in Decreasing about c Activity Ratios Total Asset Turnover Ratio Net Fixed Assets Turnover Ratio Age of Plant Ratio 1.02 3.59 9.86 Above Above Below 1.01 2.56 7.25 0.96 2.41 5.71 Below Below Below Increasing Near s Increasing on FAT Increasing Avg. ag Capital Structure Ratios Long-Term Debt to Net Assets Ratio Net Assets to Total Assets Ratio[2] Times Interest Earned Ratio[2] Debt Service Coverage Ratio 0.21 0.62 2.85 3.35 Below Above Above Above 2.73 0.23 2.03 2.00 3.14 0.17 5.41 4.02 Above Below Below Below Decreasing Though Increasing std. Th Decreasing high, b Decreasing conside Ratios Liquidity Ratios Current Ratio Quick Ratio[2] Acid Test Ratio Days in Accounts Receivable Days Cash on Hand[2] Average Payment Period Newport Trend Analysis 20X1 20X0 Current Year Position Trend Position Possib Curren [1] Since Newport Hospital was less than 100 beds, HCIA -Sachs' Standard ratio values for Beds less than 100 were [2] These values were obtained from: the Health Care Financing Administration's (HCFA) Hospital Cost Report Information System Files for financial st Portraying Trend Information Current Ratio 3 Desired Position = Slightly Above NY Median 2.44 Ratio Ira Ratio, 2.44 1.95 Ira Ratio, 1.95 2 1.82 Ira Ratio, 1.82 NY Median Value, 1.32 NY Median Value, 1.36 NY Median Value, 1.39 1 0 2003 2020 2004 2021 Ira Ratio Ira – Ira Davenport Memorial Hospital NY Median Value 2005 2022 Landon Hospital Practice Exercise ACC 602 Excel Worksheet Exercises, Tab 8 Landon Community Hospital (LCH) is a 115 bed facility outside of Spokane. In 2021 the hospital generated 10,200 adjusted discharges, up 100 from year end 2020. 1) 2) 3) 4) Select the appropriate Benchmarks Indicate the desired position (above or below the benchmark) Compute the 12 ratios For each ratio, indicate if it is stronger or weaker than the benchmark 3 A) Complete the Chart for LCH (2021). 1) Current ratio 2) Days in Accounts receivable 3) Average payment period 4) Average Age of PP&E 5) Debt to Asset ratio 6) Total asset turnover 7) Fixed asset turnover 8) Operating expense per adjusted discharge 9) Days Cash on Hand (all) 10) Return on total assets 11) Total Margin 12) Financial Strength Index 2021 1 2 Desired Benchmark Position 4 Current Position Which Benchmarks should be selected LCH is a 115 bed facility 2021 Washington State Hospital benchmarks by bed size Liquidity Current ratio Quick ratio Acid test ratio Days in AR Days cash on hand Average payment period Profitability Operating Revenue / adj Discharge Operating Expense / adj Discharge Salary & Benefit % of total revenue Operating Margin Total Margin RoA RoN/A Activity Ratios Total Asset Turnover Net Fixed Asset Turnover Average Age of PP&E Capital Structure Total debt to net assets Total debt to Assets Times interest earned Debt service coverage ratio FSI 1-99 2.11 1.52 0.3 49 86 50 100-199 1.71 1.42 0.2 48 76 53 200-299 2.04 1.39 0.18 45 81 51 > 300
1.84
1.5
0.38
44
119
52
$5,090
$4,900
40.0%
3.5%
3.5%
4.0%
4.5%
$5,300
$5,100
42.0%
4.0%
4.5%
5.0%
10.0%
$5,770
$5,540
41.0%
4.1%
5.5%
5.5%
8.5%
$6,100
$5,895
39.0%
4.0%
6.0%
6.0%
11.0%
1.00
1.90
12.0
1.03
2.04
10.9
1.06
2.21
11.2
1.08
2.50
11.3
0.72
0.60
4.00
3.50
-.38
0.65
0.55
4.43
6.36
0.18
0.55
0.50
4.60
5.50
0.46
0.50
0.48
5.00
7.00
0.29
What is the desired Position for each ratio?
LCH
2021
1) Current ratio
100-199
Desired
Benchmark Position
above
1.71
2) Days in Accounts receivable
48
3) Average payment period
53
below
below
4) Average Age of PP&E
10.9
below
5) Debt to Asset ratio
0.55
below
6) Total asset turnover
1.03
above
7) Fixed asset turnover
2.04
8) Operating exp. per adj. discharge
$5,100
above
below
9) Days Cash on Hand (all)
76
above
10) Return on total assets
5.0%
above
Total Margin
11) Operating
Margin
4.5%
above
12) Financial Strength Index
-0.56
above
Calculate the value for each Ratio…
Current
Position
Current Ratio
17,400,000
8,300,000
= 2.10
CA / CL
Landon Community Hospital
Balance Sheet
December 31,
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Total Current Assets
Property Plant & Equipment
Gross PP&E
Accumulated Depreciation
Net PP&E
Total Assets
$34,500,000
($8,000,000)
$26,500,000
$43,900,000
Current Liabilities
Accounts Payable
Wages Payable
Total Current Liabilities
Bonds payable
$500,000
$7,800,000
$8,300,000
$9,000,000
Net Assets
Total Liabilities & Net Assets
$26,600,000
$43,900,000
2021
$6,000,000
$10,000,000
$1,000,000
$400,000
$17,400,000
Days in AR
AR / (Patient Revenue/day)
10,000,000 / (54,000,000 / 365)
10,000,000 / 148 = 68
Landon Community Hospital
Statement of Operations
Years ended 12/31
2021
Revenues
Net Patient Revenue
$54,000,000
Other Revenue
$1,000,000
Total Operating Revenue
$55,000,000
Expenses
Salary & Wages
$19,000,000
Fringe Benefits
$4,000,000
Drugs & Supplies
$5,000,000
Depreciation Expense
$1,000,000
All Other Expenses
$24,000,000
Total Operating Expense
Operating Profit
Non operating Income
Excess of revenue over expense
$53,000,000
Landon Community Hospital
Balance Sheet
December 31,
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Total Current Assets
Property Plant & Equipment
Gross PP&E
Accumulated Depreciation
Net PP&E
Total Assets
$34,500,000
($8,000,000)
$26,500,000
$43,900,000
Current Liabilities
Accounts Payable
Wages Payable
Total Current Liabilities
Bonds payable
$500,000
$7,800,000
$8,300,000
$9,000,000
Net Assets
Total Liabilities & Net Assets
$26,600,000
$43,900,000
2021
$6,000,000
$10,000,000
$1,000,000
$400,000
$17,400,000
$2,000,000
$0
$2,000,000
Average
Payment Period
8,300,000 / (53,000,000-1,000,000 / 365)
8,300,000 / 142.5 = 58
CL / (Cash expenses/day)
Landon Community Hospital
Statement of Operations
Years ended 12/31
2021
Revenues
Net Patient Revenue
$54,000,000
Other Revenue
$1,000,000
Total Operating Revenue
$55,000,000
Expenses
Salary & Wages
$19,000,000
Fringe Benefits
$4,000,000
Drugs & Supplies
$5,000,000
Depreciation Expense
$1,000,000
All Other Expenses
$24,000,000
Total Operating Expense
Operating Profit
Non operating Income
Excess of revenue over expense
$53,000,000
Landon Community Hospital
Balance Sheet
December 31,
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Total Current Assets
Property Plant & Equipment
Gross PP&E
Accumulated Depreciation
Net PP&E
Total Assets
$34,500,000
($8,000,000)
$26,500,000
$43,900,000
Current Liabilities
Accounts Payable
Wages Payable
Total Current Liabilities
Bonds payable
$500,000
$7,800,000
$8,300,000
$9,000,000
Net Assets
Total Liabilities & Net Assets
$26,600,000
$43,900,000
2021
$6,000,000
$10,000,000
$1,000,000
$400,000
$17,400,000
$2,000,000
$0
$2,000,000
Average Age of PP&E
Accum Deprec. / Deprec Exp.
8,000,000/1,000,000 = 8.0 years
Landon Community Hospital
Statement of Operations
Years ended 12/31
2021
Revenues
Net Patient Revenue
$54,000,000
Other Revenue
$1,000,000
Total Operating Revenue
$55,000,000
Expenses
Salary & Wages
$19,000,000
Fringe Benefits
$4,000,000
Drugs & Supplies
$5,000,000
Depreciation Expense
$1,000,000
All Other Expenses
$24,000,000
Total Operating Expense
Operating Profit
Non operating Income
Excess of revenue over expense
$53,000,000
Landon Community Hospital
Balance Sheet
December 31,
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Total Current Assets
Property Plant & Equipment
Gross PP&E
Accumulated Depreciation
Net PP&E
Total Assets
$34,500,000
($8,000,000)
$26,500,000
$43,900,000
Current Liabilities
Accounts Payable
Wages Payable
Total Current Liabilities
Bonds payable
$500,000
$7,800,000
$8,300,000
$9,000,000
Net Assets
Total Liabilities & Net Assets
$26,600,000
$43,900,000
2021
$6,000,000
$10,000,000
$1,000,000
$400,000
$17,400,000
$2,000,000
$0
$2,000,000
Debt to Asset Ratio
(8,300,000+9,000,000)
43,900,000
Total Liab. / Total Assets
Landon Community Hospital
Statement of Operations
Years ended 12/31
2021
Revenues
Net Patient Revenue
$54,000,000
Other Revenue
$1,000,000
Total Operating Revenue
$55,000,000
Expenses
Salary & Wages
$19,000,000
Fringe Benefits
$4,000,000
Drugs & Supplies
$5,000,000
Depreciation Expense
$1,000,000
All Other Expenses
$24,000,000
Total Operating Expense
Operating Profit
Non operating Income
Excess of revenue over expense
$53,000,000
$2,000,000
$0
$2,000,000
= .39
Landon Community Hospital
Balance Sheet
December 31,
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Total Current Assets
Property Plant & Equipment
Gross PP&E
Accumulated Depreciation
Net PP&E
Total Assets
$34,500,000
($8,000,000)
$26,500,000
$43,900,000
Current Liabilities
Accounts Payable
Wages Payable
Total Current Liabilities
Bonds payable
$500,000
$7,800,000
$8,300,000
$9,000,000
Net Assets
Total Liabilities & Net Assets
$26,600,000
$43,900,000
2021
$6,000,000
$10,000,000
$1,000,000
$400,000
$17,400,000
Total Asset Turnover
Operating Revenue / Assets
55,000,000/43,900,000 = 1.25
Landon Community Hospital
Statement of Operations
Years ended 12/31
2021
Revenues
Net Patient Revenue
$54,000,000
Other Revenue
$1,000,000
Total Operating Revenue
$55,000,000
Expenses
Salary & Wages
$19,000,000
Fringe Benefits
$4,000,000
Drugs & Supplies
$5,000,000
Depreciation Expense
$1,000,000
All Other Expenses
$24,000,000
Total Operating Expense
Operating Profit
Non operating Income
Excess of revenue over expense
$53,000,000
Landon Community Hospital
Balance Sheet
December 31,
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Total Current Assets
Property Plant & Equipment
Gross PP&E
Accumulated Depreciation
Net PP&E
Total Assets
$34,500,000
($8,000,000)
$26,500,000
$43,900,000
Current Liabilities
Accounts Payable
Wages Payable
Total Current Liabilities
Bonds payable
$500,000
$7,800,000
$8,300,000
$9,000,000
Net Assets
Total Liabilities & Net Assets
$26,600,000
$43,900,000
2021
$6,000,000
$10,000,000
$1,000,000
$400,000
$17,400,000
$2,000,000
$0
$2,000,000
Fixed Asset Turnover
55,000,000/26,500,000 = 2.08
Operating Revenue / Fixed Assets
Landon Community Hospital
Statement of Operations
Years ended 12/31
2021
Revenues
Net Patient Revenue
$54,000,000
Other Revenue
$1,000,000
Total Operating Revenue
$55,000,000
Expenses
Salary & Wages
$19,000,000
Fringe Benefits
$4,000,000
Drugs & Supplies
$5,000,000
Depreciation Expense
$1,000,000
All Other Expenses
$24,000,000
Total Operating Expense
Operating Profit
Non operating Income
Excess of revenue over expense
$53,000,000
Landon Community Hospital
Balance Sheet
December 31,
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Total Current Assets
Property Plant & Equipment
Gross PP&E
Accumulated Depreciation
Net PP&E
Total Assets
$34,500,000
($8,000,000)
$26,500,000
$43,900,000
Current Liabilities
Accounts Payable
Wages Payable
Total Current Liabilities
Bonds payable
$500,000
$7,800,000
$8,300,000
$9,000,000
Net Assets
Total Liabilities & Net Assets
$26,600,000
$43,900,000
2021
$6,000,000
$10,000,000
$1,000,000
$400,000
$17,400,000
$2,000,000
$0
$2,000,000
Operating Expense / Adjusted Discharge
Operating Exp. / Adj. Dsch.
53,000,000 / 10,200 = $5,196
Landon Community Hospital
Statement of Operations
Years ended 12/31
2021
Revenues
Net Patient Revenue
$54,000,000
Other Revenue
$1,000,000
Total Operating Revenue
$55,000,000
Expenses
Salary & Wages
$19,000,000
Fringe Benefits
$4,000,000
Drugs & Supplies
$5,000,000
Depreciation Expense
$1,000,000
All Other Expenses
$24,000,000
Total Operating Expense
Operating Profit
Non operating Income
Excess of revenue over expense
$53,000,000
Landon Community Hospital
Balance Sheet
December 31,
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Total Current Assets
Property Plant & Equipment
Gross PP&E
Accumulated Depreciation
Net PP&E
Total Assets
2021
$6,000,000
$10,000,000
$1,000,000
$400,000
$17,400,000
In 2021 the
hospital generated
10,200 adjusted$34,500,000
discharges ($8,000,000)
$26,500,000
$43,900,000
Current Liabilities
Accounts Payable
Wages Payable
Total Current Liabilities
Bonds payable
$500,000
$7,800,000
$8,300,000
$9,000,000
Net Assets
Total Liabilities & Net Assets
$26,600,000
$43,900,000
$2,000,000
$0
$2,000,000
Days cash on hand (all)
Cash / (Cash Expenses / days)
6,000
((53,000-1,000)/365) =
Landon Community Hospital
Statement of Operations
Years ended 12/31
2021
Revenues
Net Patient Revenue
$54,000,000
Other Revenue
$1,000,000
Total Operating Revenue
$55,000,000
Expenses
Salary & Wages
$19,000,000
Fringe Benefits
$4,000,000
Drugs & Supplies
$5,000,000
Depreciation Expense
$1,000,000
All Other Expenses
$24,000,000
Total Operating Expense
Operating Profit
Non operating Income
Excess of revenue over expense
$53,000,000
42
Landon Community Hospital
Balance Sheet
December 31,
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Total Current Assets
Property Plant & Equipment
Gross PP&E
Accumulated Depreciation
Net PP&E
Total Assets
$34,500,000
($8,000,000)
$26,500,000
$43,900,000
Current Liabilities
Accounts Payable
Wages Payable
Total Current Liabilities
Bonds payable
$500,000
$7,800,000
$8,300,000
$9,000,000
Net Assets
Total Liabilities & Net Assets
$26,600,000
$43,900,000
2021
$6,000,000
$10,000,000
$1,000,000
$400,000
$17,400,000
$2,000,000
$0
$2,000,000
Return on Total Assets
Excess Revenue over Expense
Total Assets
2,000,000/43,900,000
Landon Community Hospital
Statement of Operations
Years ended 12/31
2021
Revenues
Net Patient Revenue
$54,000,000
Other Revenue
$1,000,000
Total Operating Revenue
$55,000,000
Expenses
Salary & Wages
$19,000,000
Fringe Benefits
$4,000,000
Drugs & Supplies
$5,000,000
Depreciation Expense
$1,000,000
All Other Expenses
$24,000,000
Total Operating Expense
Operating Profit
Non operating Income
Excess of revenue over expense
$53,000,000
= 4.6%
Landon Community Hospital
Balance Sheet
December 31,
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Total Current Assets
Property Plant & Equipment
Gross PP&E
Accumulated Depreciation
Net PP&E
Total Assets
$34,500,000
($8,000,000)
$26,500,000
$43,900,000
Current Liabilities
Accounts Payable
Wages Payable
Total Current Liabilities
Bonds payable
$500,000
$7,800,000
$8,300,000
$9,000,000
Net Assets
Total Liabilities & Net Assets
$26,600,000
$43,900,000
2021
$6,000,000
$10,000,000
$1,000,000
$400,000
$17,400,000
$2,000,000
$0
$2,000,000
Total Margin
Excess Revenue over Expense
Total Revenue & Income
2,000 / (55,000 + 0) = 3.6%
Landon Community Hospital
Statement of Operations
Years ended 12/31
2021
Revenues
Net Patient Revenue
$54,000,000
Other Revenue
$1,000,000
Total Operating Revenue
$55,000,000
Expenses
Salary & Wages
$19,000,000
Fringe Benefits
$4,000,000
Drugs & Supplies
$5,000,000
Depreciation Expense
$1,000,000
All Other Expenses
$24,000,000
Total Operating Expense
Operating Profit
Non operating Income
Excess of revenue over expense
$53,000,000
Landon Community Hospital
Balance Sheet
December 31,
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Total Current Assets
Property Plant & Equipment
Gross PP&E
Accumulated Depreciation
Net PP&E
Total Assets
$34,500,000
($8,000,000)
$26,500,000
$43,900,000
Current Liabilities
Accounts Payable
Wages Payable
Total Current Liabilities
Bonds payable
$500,000
$7,800,000
$8,300,000
$9,000,000
Net Assets
Total Liabilities & Net Assets
$26,600,000
$43,900,000
2021
$6,000,000
$10,000,000
$1,000,000
$400,000
$17,400,000
$2,000,000
$0
$2,000,000
Composite score
Excellent
>3
Good
0-3
Fair
-2 to 0
Poor
< -2 Financial Strength Formula: 1. (Total Margin – .04) / .04 = 2. (Days Cash (all) – 120) / 120 = 3. (.50 – Debt/Assets) / .50 = 4. (9.0 - Age of PP&E)/ 9.0 = Ratio Values 3.6% .036 FSI Values (.036-.04) / .04 = -0.1 42 (42-120) / 120 = -0.65 39% 0.39 (.50 – .39) / .50 = 0.22 8.0 (9.0 – 8.0) / 9.0 = 0.11 -0.42 * Rounding to two decimal place Fair Are they “stronger” or “weaker” than the benchmark? Landon 2021 Desired Benchmark Position 1) Current ratio 2.1 1.71 above 2) Days in Accounts receivable 68 48 below 3) Average payment period 58 53 below 4) Average Age of PP&E 8.0 10.9 below 5) Debt to Asset ratio 0.39 0.55 below 6) Total asset turnover 1.25 1.03 above 7) Fixed asset turnover 2.08 2.04 above 8) Operating exp. per adj. discharge $5,196 $5,100 below 9) Days Cash on Hand (all) 42 76 above 10) Return on total assets 4.6% 5.0% above 11) Total Margin 3.6% 4.0% above 12) Financial Strength Index -0.42 -.56 above Current Position B) What would you recommend management focus on and why? Landon 2021 Desired Benchmark Position Current Position 1) Current ratio 2.1 1.71 above Stronger 2) Days in Accounts receivable 68 48 below Weaker 3) Average payment period 58 53 below Weaker 4) Average Age of PP&E 8.0 10.9 below Stronger 5) Debt to Asset ratio 0.39 0.55 below Stronger 6) Total asset turnover 1.25 1.03 above Stronger 7) Fixed asset turnover 2.08 2.04 above Stronger 8) Operating exp. per adj. discharge $5,196 $5,100 below Weaker 9) Days Cash on Hand (all) 42 76 above Weaker 10) Return on total assets 4.6% 5.0% above Weaker 11) Total Margin 3.6% 4.5% above Weaker 12) Financial Strength Index -0.42 -.56 above Stronger Expenses are too high and profitability is too low and AR collection needs improvement Test your understanding 10 MC questions ACC 602 Excel Worksheet Exercises, Tab 9 1 A ratio result of .0031 can be expressed as: 0.031% 0.31% 3.1% none of the above 2 Ratio for Days Cash on Hand (all) include all of the following EXCEPT: Cash Board designated investments Assets whose use is limited held by Trustee Investments 3 Why is depreciation expense subtracted in the denominator of the calculation of Days Cash on Hand (DCoH)? unclear if the entity is using straight line or accelerated because depreciation is used in the calculation of accumulated depreciation it is a non-cash expense It is not subtracted it is added in the denominator Cash + Investments ((Expenses – depreciation) / 365) 4 The denominator in the calculation of "Days in AR" uses which of the following? Patient revenue Operating revenue Total revenue Patient Charges Accounts Receivable (Patient revenue / 365) 5 If the Debt to Asset ratio is 0.40, what is the Equity to Asset ratio? A=L+E 100 = 40 + E 60 = E 60/100 = .60 .67 .60 .40 can not be computed from the information provided 6 In general, a value above the benchmark for current ratio (CA/CL) is better worse Current Assets Current Liabilities 7 In general, a value above the benchmark for number of Days in AR ratio is better worse Accounts Receivable (Patient revenue / 365) 8 In general, a value above the benchmark for Fixed Asset Turnover (Revenue/FA) ratio is better worse 9 In general, a value above the benchmark for Debt to Asset (TL/TA) ratio is better worse 10 All of the following are used in the FSI calculation EXCEPT: Total margin Days Cash on Hand (all) Debt to Asset ratio Days in AR Financial Strength Formula: 1. (Total Margin – .04) / .04 = 2. (Days Cash (all) – 120) /120= 3. (.50 – Debt/Assets) / .50 = 4. (9.0 - Age of PP&E) / 9.0 = 4.3) Horizontal (Trend) Analysis Horizontal Analysis Trend Analysis Horizontal analysis compares changes in a given line item between two consecutive periods (i.e., Cash in 20X0 vs. 20X1). Trend analysis extends the concept of horizontal analysis over multiple time periods, using the first year as the base year. Horizontal Analysis Two Finger method Landon Community Hospital Statement of Operations Years ended 12/31 2019 2018 Net Patient Revenue $54,000,000 $53,000,000 Other Revenue $1,000,000 $500,000 $55,000,000 $53,500,000 Salary & Wages $19,000,000 $18,300,000 Fringe Benefits $4,000,000 $3,700,000 Drugs & Supplies $5,000,000 $4,800,000 Depreciation Expense $1,000,000 $900,000 All Other Expenses $24,000,000 $26,300,000 $53,000,000 $54,000,000 $2,000,000 ($500,000) $0 $100,000 $2,000,000 ($400,000) Revenues Total Operating Revenue Expenses Total Operating Expense Operating Profit Non operating Income Excess of revenue over expense Horizontal Analysis Two Finger method Landon Community Hospital Statement of Operations Years ended 12/31 2021 2020 Net Patient Revenue $54,000,000 $53,000,000 Other Revenue $1,000,000 $500,000 $55,000,000 $53,500,000 Salary & Wages $19,000,000 $18,300,000 Fringe Benefits $4,000,000 $3,700,000 Drugs & Supplies $5,000,000 $4,800,000 Depreciation Expense $1,000,000 $900,000 All Other Expenses $24,000,000 $26,300,000 $53,000,000 $54,000,000 $2,000,000 ($500,000) $0 $100,000 $2,000,000 ($400,000) Revenues Total Operating Revenue Expenses Total Operating Expense Operating Profit Non operating Income Excess of revenue over expense Patient volume or Payment Amount? Landon Community Hospital Statement of Operations Year Ended December 31, Revenue 2021 2020 $ Var Var Net Patient Revenue $54,000,000 $53,000,000 $1,000,000 2% Other Revenue $1,000,000 $500,000 $500,000 100% $55,000,000 $53,500,000 $1,500,000 3% Salary & Wages $19,000,000 $18,300,000 $700,000 4% Fringe Benefits $4,000,000 $3,700,000 $300,000 8% Drugs & Supplies $5,000,000 $4,800,000 $200,000 4% Depreciation Expense $1,000,000 $900,000 $100,000 11% All Other Expenses $24,000,000 $26,300,000 ($2,300,000) -9% $53,000,000 $54,000,000 ($1,000,000) -2% $2,000,000 ($500,000) $2,500,000 500% $0 $100,000 ($100,000) -100% $2,000,000 ($400,000) $2,400,000 Total Operating Revenue Expenses Total Operating Expense Operating Profit Non operating Income Excess of revenue over expense 600% Why? Why? Landon Community Hospital Balance Sheet December 31, Current Assets Cash Accounts Receivable Inventory Prepaid expenses Total Current Assets Property Plant & Equipment Gross PP&E Accumulated Depreciation Net PP&E Total Assets Current Liabilities Accounts Payable 2021 $6,000,000 $10,000,000 $1,000,000 $400,000 $17,400,000 2020 $4,000,000 $8,500,000 $1,000,000 $300,000 $13,800,000 $ Var $2,000,000 $1,500,000 $0 $100,000 $3,600,000 Var 50% 18% 0% 33% 26% $34,500,000 ($8,000,000) $26,500,000 $43,900,000 $34,200,000 ($7,500,000) $26,700,000 $40,500,000 $300,000 1% ($500,000) 7% ($200,000) -1% $3,400,000 8% $500,000 $760,000 ($260,000) -34% Wages Payable $7,800,000 $8,990,000 ($1,190,000) -13% Total Current Liabilities Bonds payable $8,300,000 $9,000,000 $9,750,000 ($1,450,000) -15% $8,000,000 $1,000,000 13% $26,600,000 $43,900,000 $22,750,000 $40,500,000 Net Assets Total Liabilities & Net Assets $3,850,000 17% $3,400,000 8% 4.4) Common Size Statements Vertical Analysis Common Size Financial Statements Also known as Vertical analysis … it compares the relative weight of various line items to a base number Facilitates analysis from year to year and between entities of different sizes. Income Statement: All values are a % of Revenue Revenue 2021 2020 2021 2020 Net Patient Revenue $54,000,000 $53,000,000 98% 99% Other Revenue $1,000,000 $500,000 2% 1% $55,000,000 $53,500,000 100% 100% Salary & Wages $19,000,000 $18,300,000 35% 34% Fringe Benefits $4,000,000 $3,700,000 7% 7% Drugs & Supplies $5,000,000 $4,800,000 9% 9% Depreciation Expense $1,000,000 $900,000 2% 2% All Other Expenses $24,000,000 $26,300,000 44% 49% $53,000,000 $54,000,000 96% 101% $2,000,000 ($500,000) 4% -1% $0 $100,000 0% 0% $2,000,000 ($400,000) 4% -1% Total Operating Revenue Expenses Total Operating Expense Operating Profit Non operating Income Excess of revenue over expense $54/($55+$0) $53/($53.5+.1) Balance Sheet: All values presented as a % of Total Assets Current Assets 2021 2020 2021 2020 Cash $6,000,000 $4,000,000 14% 10% Accounts Receivable $10,000,000 $8,500,000 23% 21% Inventory $1,000,000 $1,000,000 2% 2% $400,000 $300,000 1% 1% $17,400,000 $13,800,000 40% 34% Gross PP&E $34,500,000 $34,200,000 79% 84% Accum. Depreciation ($8,000,000) ($7,500,000) -18% -19% $26,500,000 $26,700,000 $43,900,000 $40,500,000 60% 100% 66% 100% Accounts Payable Wages Payable Total Current Liabilities Bonds payable Net Assets $500,000 $760,000 $7,800,000 $8,990,000 $8,300,000 $9,750,000 $9,000,000 $8,000,000 $26,600,000 $22,750,000 1% 18% 19% 21% 61% 2% 22% 24% 20% 56% Total Liab. & Net Assets $43,900,000 $40,500,000 100% 100% Prepaid expenses Total Current Assets Property Plant & Equipment Net PP&E Total Assets Current Liabilities $6mm/$43.9mm $4mm/$40.5mm Balance Sheet: All values presented as a % of Total Assets Current Assets 2021 2020 2021 2020 Cash $6,000,000 $4,000,000 14% 10% Accounts Receivable $10,000,000 $8,500,000 23% 21% Inventory $1,000,000 $1,000,000 2% 2% $400,000 $300,000 1% 1% $17,400,000 $13,800,000 40% 34% Gross PP&E $34,500,000 $34,200,000 79% 84% Accum. Depreciation ($8,000,000) ($7,500,000) -18% -19% $26,500,000 $26,700,000 $43,900,000 $40,500,000 60% 100% 66% 100% Accounts Payable Wages Payable Total Current Liabilities Bonds payable Net Assets $500,000 $760,000 $7,800,000 $8,990,000 $8,300,000 $9,750,000 $9,000,000 $8,000,000 $26,600,000 $22,750,000 1% 18% 19% 21% 61% 2% 22% 24% 20% 56% Total Liab. & Net Assets $43,900,000 $40,500,000 100% 100% Prepaid expenses Total Current Assets Property Plant & Equipment Net PP&E Total Assets Current Liabilities $6mm/$43.9mm $4mm/$40.5mm Is their Liquidity increasing or decreasing? Current Liabilities Long-Term Debt Total Liabilities $900 5,000 5,900 9% 49% 58% Operating Expenses Income from Operations Statement of Operations Comparison Excess of Revenues Over Expenses Small Hospital vs Large Hospital 4,300 42% Increase in Net Assets Net Assets Small and a Large Hospital Total Liabilities and Net Assets $10,200 10,000 2,000 83% 17% 2,000 17% $2,000 17% 100% Large Community Hospital Statement of Operations December 31, 20X0 % Total Revenues Net Patient Revenues $68,000 97% Investment Income 2,000 3% Total Operating Revenues 70,000 100% % % % Small Community Hospital Statement of Operations Large Community Hospital Balance Sheet December 31, 20X0 December 31, 20X0 % Total Revenues Assets Net Patient Revenues $10,000 83% Current Assets $15,000 22% Investment 2,000 17% NetIncome Plant and Equipment 50,000 75% Total Operating Revenues 12,000 100% Other Assets 2,000 3% Total Assets $67,000 100% Operating Expenses 10,000 83% Income from Operations 2,000 17% Current Liabilities $12,000 18% Long-Term Debt 35,000 52% Excess ofTotal Revenues Over Expenses 2,000 17% Liabilities 47,000 70% % % Increase Net in Net Assets $2,000 Assets 20,000 Total Liabilities and Net Assets $67,000 l s % % % % l s % % % % % % % 17% 30% 100% LargeNote: Community Hospital Statement All figures expressed in '000.of Operations December 31, 20X0 % Total Revenues Net Patient Revenues $68,000 97% Investment Income 2,000 3% Total Operating Revenues 70,000 100% Operating Expenses Income from Operations 65,000 5,000 93% 7% Excess of Revenues Over Expenses 5,000 7% Increase in Net Assets $5,000 7% Large Hospital Revenue is 6 times greater than Small Hospital Operating Expenses Income from Operations 65,000 5,000 93% 7% All numbers in (000’s) Excess of Revenues Over Expenses 5,000 7% Current Liabilities Long-Term Debt Total Liabilities $900 5,000 5,900 9% 49% 58% Operating Expenses Income from Operations Statement of Operations Comparison Excess of Revenues Over Expenses Small Hospital vs Large Hospital 4,300 42% Increase in Net Assets Net Assets Small and a Large Hospital Total Liabilities and Net Assets $10,200 10,000 2,000 83% 17% 2,000 17% $2,000 17% 100% Large Community Hospital Statement of Operations December 31, 20X0 % Total Revenues Net Patient Revenues $68,000 97% Investment Income 2,000 3% Total Operating Revenues 70,000 100% % % % Small Community Hospital Statement of Operations Large Community Hospital Balance Sheet December 31, 20X0 December 31, 20X0 % Total Revenues Assets Net Patient Revenues $10,000 83% Current Assets $15,000 22% Investment 2,000 17% NetIncome Plant and Equipment 50,000 75% Total Operating Revenues 12,000 100% Other Assets 2,000 3% Total Assets $67,000 100% Operating Expenses 10,000 83% Income from Operations 2,000 17% Current Liabilities $12,000 18% Long-Term Debt 35,000 52% Excess ofTotal Revenues Over Expenses 2,000 17% Liabilities 47,000 70% % % Increase Net in Net Assets $2,000 Assets 20,000 Total Liabilities and Net Assets $67,000 l s % % % % l s % % % % % % % 17% 30% 100% LargeNote: Community Hospital Statement All figures expressed in '000.of Operations December 31, 20X0 % Total Revenues Net Patient Revenues $68,000 97% Investment Income 2,000 3% Total Operating Revenues 70,000 100% Operating Expenses Income from Operations 65,000 5,000 93% 7% Excess of Revenues Over Expenses 5,000 7% Increase in Net Assets $5,000 7% Large Hospital Revenue is 6 times greater than Small Hospital Small Hospital relies more on Investment income Operating Expenses Income from Operations 65,000 5,000 93% 7% All numbers in (000’s) Excess of Revenues Over Expenses 5,000 7% Financial Analysis Financial statements are records of the past. Good decision making requires knowledge of the future.... It’s tough to make predictions .... especially about the future Yogi Berra Closing Pearls & Notable Quotes: One more good idea and we are out of business….. For everything that is done there is a good reason, and then there is the real reason….. I don’t have to outrun the bear; I just have to outrun you We need leaders who are Owners and not Renters When someone say...