Health Care Financial Statements

Chapter 2

Learning Objectives

• Identify basic financial statements for health care entities

• Read basic financial statements

Terms to Know

• Generally Accepted Accounting Principles(GAAP)

• Financial Accounting Standards Board (FASB) used on both commercial and not for profit

• Governmental Accounting Standards Board (GASB) government- standard set of financial statements

Financial accounting practice is governed by

concepts and rules known as generally accepted

accounting principles (GAAP).

Generally Accepted Accounting Principles

Relevant

Information

Affects the decision of

its users.

Reliable Information Is trusted by

users.

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Comparable

Information

Used in comparisons

across years & companies.

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Principles and Assumptions of Accounting

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Measurement principle (also called

cost principle) means that accounting

information is based on actual cost.

Going-concern assumption means

that accounting information reflects a

presumption the business will

continue operating.

Monetary unit assumption means we

can express transactions in money.

Revenue recognition principle

provides guidance on when a

company must recognize revenue.

Business entity assumption means

that a business is accounted for

separately from its owner or other

business entities.

Matching principle (expense

recognition) prescribes that a

company must record its expenses

incurred to generate the revenue.

Full disclosure principle requires a

company to report the details behind

financial statements that would impact

users’ decisions.1-5

Time period assumption presumes

that the life of a company can be

divided into time periods, such as

months and years.

In the United States, the Securities and Exchange

Commission, a government agency, has the legal authority

to establish reporting requirements and set GAAP for

companies that issue stock to the public.

Setting Accounting Principles

The Financial Accounting

Standards Board is the private

group that sets both broad and

specific principles.

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The International Accounting Standards Board (IASB) issues inter-

national standards that identify preferred accounting practices

in other countries. More than 100 countries now require or permit

companies to prepare financial reports following IFRS. 1-6

Governmental Accounting Standards Board (GASB)

• An organization whose main purpose is to improve

and create accounting reporting standards or generally

accepted accounting principles (GAAP).

• These standards make it easier for users to

understand and use the financial records of both state

and local governments.

• The Government Accounting Standards Board

(GASB) is funded and monitored by the Financial

Accounting Foundation (FAF).

Statements used in Not-for-Profit Health Care Entities

• Balance sheet

• Statement of Operations

• Statement of Changes in Net Assets

• Statement of Cash Flows

1. Balance Sheet

• Snapshot of an organization

• Summary of the entity’s assets, liabilities, and net assets

• Captures what the entity looks like at a particular point in time

• Created usually the last day of the accounting period

Balance Sheet Components

• Heading-Name of the organization and date

• Body includes:

• Assets=Liabilities + Net Assets

• Liabilities have 2 categories-current and non current

• Net Assets=Communities interest in the assets of the not for profit

• Footnotes=additional key information

Assets

• Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

• Represent resources owned

• Are recorded at their cost unless donated

• If donated recorded at fair value at date of donation

More on Assets• Current assets are those used or consumed within a year

• Limited or restricted to use in non-current portion identified for how they can be used

• Non-current assets are resources to be used or consumed over a period of time > one year

• Cash and cash equivalents are the most liquid asset on the balance sheet

• Non-current and long-term are used interchangeably

Current & Noncurrent Assets

• Current may include : cash, investments, limited or restricted as to use current position, patient accounts receivable, estimated receivables from 3rd party payers, inventories, assets held for sale, prepaid expenses

• Non-current may include:

self insurance, benefit plans,

capital equipment (includes long-lasting goods acquired and owned by a company or organization that are not consumed in the normal course of business—goods such as machinery, trucks, large computers, and office furniture), held by the board under bond indenture agreements,

property and equipment, goodwill, net of accumulated amortization

Liabilities

• Obligations of the entity to pay its creditors

• Can be debts or other obligations

• 2 types:

Current Liabilities-Due within one year

Noncurrent liabilities- Resources used or consumed over periods > one year

Current & Noncurrent Liabilities

• Current could include: accounts payable, accrued expenses (expenses are recognized when incurred), salaries & wages, estimated payables to third parties, short term borrowings, commercial paper

• Noncurrent could include: long term debt, self-insurance reserves, accrued pension and retiree health costs

Net Assets

• Remaining assets after deducting its liabilities

• 3 classes:

Permanently restricted

Temporarily restricted

Unrestricted

May also include: non-controlling ownership interest in subsidiaries

• Unrestricted Net Assets

Unrestricted net assets are part, but not all, of what would be left over if the organization’s liabilities were all satisfied today.

This portion of its net assets can be used however the organization sees fit. That means that their use is not restricted by law, shareholders or donors.

• Restricted Net Assets

Unlike unrestricted net assets, restricted net assets can’t be used however an organization sees fit.

Rather, these assets must be used in accordance with the entity that placed the restrictions on their use, such as donors in a nonprofit organization, shareholders in a for-profit corporation or even the law.

Restrictions might state how much of that money can be used in any given year, or what the money can be used to purchase or pay for.

• Permanently Restricted

Permanently restricted assets are donated items that have limitations on use that are attached to it for perpetuity.

Assets that are classified as permanently restricted must be listed as a separate category of assets on the charity’s Statement of Activities.

• Temporarily Restricted

Temporarily restricted assets are those that are donated subject to restrictions that are limited to a specific period of time.

An example would be property donated that could only be used for a certain purpose for a period of five years.

Temporarily restricted assets must be listed separately from permanently restricted and unrestricted assets on the charity’s Statement of Activities

• Non-controlling ownership interest in subsidiaries

• The shift to the term “non-controlling interest” will emphasize a parent’s substantive control over a subsidiary rather than a simple ownership percentage and will more usefully reflect the underlying economic and accounting concepts

Question 1

Given:

• Gross plant, property, and equipment $65,000,000

• Cash $6,000,000

• Net accounts receivable $12,700,000

• Accrued expenses $5,200,000

• Inventory $5,300,000

• Long-term debt $22,500,000

• Accounts payable $8,300,000

• Accumulated depreciation $28,500,000

Solution:

Stone Hospital Balance SheetSeptember 30, 20X1

9/30/20X1 9/30/20X1

Current assetsCash $6,000,000 Net accounts receivable 12,700,000 Inventory 5,300,000 Total current assets 24,000,000Gross plant, property, and equipment 65,000,000(less accumulated

depreciation) (28,500,000) Net plant, property,and equipment 36,500,000

Total assets $60,500,000

Current liabilitiesAccounts payable $8,300,000Accrued expenses 5,200,000Total current liabilities 13,500,000

Long-term debt 22,500,000

Total liabilities 36,000,000Net assets:Total net assets 24,500,000

Total liabilities and net assets $60,500,000

Question 2:

Given:

• Gross plant, property, and equipment $70,000,000

• Accrued expenses $6,000,000

• Cash $8,000,000

• Net accounts receivable $15,500,000

• Accounts payable $7,000,000

• Long-term debt $45,000,000

• Supplies $3,000,000

• Accumulated depreciation $5,000,000

Solution:

Ray HospitalBalance Sheet

September 30, 20X1

Current assetsCash $8,000,000 Net accounts receivable 15,500,000 Supplies 3,000,000 Total current assets 26,500,000Gross plant, property, and equipment 70,000,000(less accumulated

depreciation) (5,000,000) Net plant, property,and equipment 65,000,000

Total assets $91,500,000

Current liabilitiesAccounts payable $7,000,000Accrued expenses 6,000,000Total current liabilities 13,000,000

Long-term debt 45,000,000

Total liabilities 58,000,000Net assets:Total net assets 33,500,000

Total liabilities and net assets $91,500,000

2. Statement of Operations

• Summary of the entity’s revenues and expenses over a period of time

• Period is usually the time between statements

• Uses the accrual basis for accounting

• accruals (accrued revenues or accrued expenses)

• It does not use the cash basis for accounting

• Represents how much the entity earned, its gains and other sources of revenue and the resources used during the accounting period

Statement of Operation Components

• Title-name of entity, statement and period for information

• Unrestricted revenue, gains and other support

• Net patient services revenue

• Premium revenue

• Other revenue

• Provision for bad debt

• Net assets released from restriction

Statement of Operations continued

• Expenses

• Depreciation and amortization (non cash expenses)

• Other

• Operating Income: A company's income from the goods and services it provides, less its operating expenses and depreciation

• Non operating items: operating expenses and net income (loss) measures

• Excess of revenue over expenses

• Excess of revenue over expenses, net of non controlling interest

Question 3:

Given:

• Net patient revenues $720,000

• Interest expense $18,000

• Net assets released from restriction for operations $220,000

• Depreciation expense $65,000

• Labor expense $444,000

• Provision for bad debt $7,000

• Supply expense $144,000

Snead HospitalStatement of Operations

For the Year Ended September 30, 20X1

Unrestricted revenues

Net patient revenue (net of contractual allowances) $720,000

Provision for bad debts (7,000)

Net patient service revenue less provision for bad debts 713,000

Net assets released from restriction 220,000

Total revenues 933,000

Operating expenses:

Labor expense 444,000

Supply expense 144,000

Depreciation expense 65,000

Interest expense 18,000

Total operating expenses 671,000

Excess of revenues over expenses 262,000

Increase in unrestricted net assets $262,000

Question 4:

Given:

• Patient service revenue (net of contractuals) $950,000

• Supply expense $255,000

• Net assets released from restriction for operations $45,000

• Depreciation expense $35,000

• Transfer to parent corporation $9,500

• Labor expense $300,000

• Provision for bad debts $12,000

• Unrealized gains from available for sale securities $150,000

Moore HospitalStatement of Operations

For the Year Ended September 30, 20X19/30/20X1

Unrestricted revenue

Patient service revenue (net of contractual) $950,000

Provision for bad debts ($12,000)

Net patient service revenue $938,000

Net assets released from restriction for operations 45,000

Total revenue 983,000

Operating expenses:

Labor expense 300,000

Supply expense 255,000

Depreciation expense 35,000

Total operating expenses 590,000

Operating income 393,000

Unrealized gains from available for sale securities 150,000

Excess of revenues over expenses 543,000

Transfer to parent corporation (9,500)

Question 5 :Insurance expense $55,000 Depreciation expense $33,000

Cash $61,000 General expense $255,000

Patient revenues (net of contractuals )$1,100,000

Transfer to parent corporation $55,000

Net accounts receivable $350,000 Beginning balance, unrestricted net assets$275,000

Ending balance, temporarily restricted net assets $48,000

Accounts payable $23,000

Wages payable $37,000

Prepaid expenses $8,000 Long-term debt $270,000 Supply expense $65,000 Gross plant, property, and equipment

$900,000 Net assets released from temporary restriction $22,000

Beginning balance, temporarily restricted net assets $70,000Provision for bad debts $8,000Labor expense $470,000Accumulated depreciation $450,000Ending / beginning balance, permanently restricted net assets $35,000Ending balance, unrestricted net assets

$456,000

solutionExton Outpatient Center

Balance Sheet September 30, 20X1

Current assetsCash $61,000 Net accounts receivable 350,000 Prepaid expenses 8,000 Total current assets 419,000Gross plant, property, and equipment 900,000 (less accumulated depreciation) (450,000) Net plant, property,and equipment 450,000

Total assets $869,000

Current liabilitiesAccounts payable $23,000Wages Payable 37,000Total current liabilities 60,000

Long-term debt 270,000

Total liabilities 330,000Net assets:Ending balance, unrestricted net assets 456,000

Ending balance, temporarily restricted net assets$48,000

Ending / beginning balance, permanently restricted net assets 35,000

Total net assets 539,000

Total liabilities and net assets $869,000

Statement of Changes in Net Assets

• Repeats some of the information on the statement of operations to explain changes in unrestricted net assets but also adds information about changes in restricted net assets

• Areas covered are unrestricted net assets, temporarily restricted net assets, permanently restricted net assets, increase in net assets and net assets at the beginning and end of the year

Question 6: Insurance expense $55,000 Cash $61,000 Patient revenues (net of contractuals ) $1,100,000Net accounts receivable $350,000 Ending balance, temporarily restricted net assets $48,000Wages payable $37,000Prepaid expenses $8,000 Long-term debt $270,000Supply expense $65,000 Gross plant, property, and equipment $900,000 Net assets released from temporary restriction $22,000

Depreciation expense $33,000General expense $255,000Transfer to parent corporation

$55,000Beginning balance, unrestricted net assets $275,000Accounts payable $23,000Beginning balance, temporarily restricted net assets $70,000Provision for bad debts $8,000Labor expense $470,000Accumulated depreciation $450,000Ending / beginning balance, permanently restricted net assets

$35,000Ending balance, unrestricted net assets $456,000

Unrestricted revenue Patient revenues (net of contractuals )

$1,100,000 Provision for bad debts ($8,000)Net patient service revenue $1,092,000

Net assets released from temporary restriction $22,000

Total revenues 1,114,000

Operating expenses: Labor expense 470,000 General expense 255,000 Supply expense 65,000Insurance expense 55,000 Depreciation expense 33,000 Total operating expenses 878,000 Excess of revenues over expenses 236,000 Transfer to parent corporation (55,000) Increase in unrestricted net assets $181,000

Unrestricted net assetsExcess of revenues over expenses

236,000

Transfer to parent corporation (55,000)

Change in unrestricted net assets181,000

Temporarily restricted net assetsNet assets released from temporary restriction

(22,000)

Change in temporarily restricted net assets (22,000)

Permanently restricted net assetsChange in permanently restricted net assets 0

Increase in net assets 159,000Beginning balance, unrestricted net assets

275,000Beginning balance, temporarily restricted net assets 70,000Ending / beginning balance, permanently restricted net assets $35,000

Ending balance, Total net assets $539,000

Exton Outpatient Center

Statement of Operations

For the Year Ended September 30, 20X1

Exton Outpatient Center

Statement of Changes in Net Assets

For the Year Ended September 30, 20X1

Statement of Cash Flows

• Takes the accrual basis financial statements that report activity as it was earned and expended or committed for expenditure and converts it to the actual flow of cash

• Covers the same time period as the statement of operations

• Discloses key noncash investing and financing transactions

Statement of Cash Flows Components

• Title-Name of entity, statement and period of time statement covers

• Cash flows from operating activities (in entity)

• Cash flows from investing activities (includes investing in self)

• Cash flows from financing activities

• Net increase (decrease) in cash & cash equivalents

• Cash & cash equivalents at beginning of year

• Cash & cash equivalents at end of the year

• Supplemental information

Outflows• Salaries and wages

• Payments to suppliers

• Taxes and fines

• Interest paid to lenders

• Other

Inflows• Receipts from customers

• Cash dividends received

• Interest from borrowers

• Other

Operating ActivitiesC 1

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Outflows• Purchasing long-term

productive assets

• Purchasing equity investments

• Purchasing debt investments

• Other

Inflows• Selling long-term productive

assets

• Selling equity investments

• Collecting principal on loans

• Other

Investing ActivitiesC1

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Outflows• Pay dividends

• Purchasing treasury stock

• Repaying cash loans

• Paying owners’ withdrawals

Inflows• Issuing its own equity

securities

• Issuing bonds and notes

• Issuing short- and long-term liabilities

Financing ActivitiesC 1

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Question 7

Givens (in '000s):Decrease in prepaid expenses $2,500Payments on long-term debt ($7,000)Cash and cash equivalents at beginning of the year $24,000Increase in inventory ($3,300)Increases in long-term debt $175,000Decrease in accrued expenses ($2,400)Change in net assets $6,500Sale of long-term investments $31,000Increase in other current liabilities $2,600Depreciation $6,600Payments on capital lease ($6,100)Purchases of equipment ($177,000)Increase in net account receivables ($50,000)Increase in accounts payable $40,000

SunviewHospitalStatement of Cash Flows (in '000s)

For the Year Ended December 31, 20X1

12/31/20X1Cash Flows from Operating Activities:

Change in net assets $6,500Adjustments to reconcile change in net assets

to net cash provided by operating activitiesDepreciation 6,600(Increase) decrease in current assets:Increase (decrease) in current liabilities

Increase in net account receivables (50,000)Increase in inventory (3,300)Decrease in prepaid expenses 2,500Increase in accounts payable 40,000Decrease in accrued expenses (2,400)Increase in other current liabilities 2,600

Net cash flows from operating activities 2,500Cash flows from investing activities

Purchases of equipment (177,000)Sale of long-term investments 31,000

Net cash used in investing activities (146,000)Cash flows from financing activities

Payments on long-term debt (7,000)Increases in long-term debt 175,000Payments on capital lease (6,100)

Net cash used in financing activities 161,900Net increase (decrease) in cash and cash equivalents 18,400Cash and cash equivalents at beginning of the year 24,000Cash and cash equivalents at end of the year $42,400

Question 8:

Givens (in '000s):

Increase in prepaid expenses ($8,000)

Increase in accrued expenses $6,000

Cash and cash equivalents at beginning of the year $62,000

Proceeds from restricted contribution $119,000

Change in net assets $12,000

Increase in net account receivables ($27,000)

Sale of equipment $46,000

Decrease in other current liabilities ($6,100)

Depreciation $43,000

Decrease in inventory $8,000

Purchase of long-term investments ($111,000)

Payments on long-term debt ($72,000)

Decrease in accounts payable ($13,000)

Hilltop HospitalStatement of Cash Flows (in '000s)

For the Year Ended December 31, 20X1

12/31/20X1Cash Flows from operating activities:

Change in net assets $12,000Adjustments to reconcile change in net assets

to net cash provided by operating activitiesDepreciation 43,000(Increase) decrease in current assets:Increase (decrease) in current liabilities

Increase in net account receivables (27,000)Decrease in inventory 8,000Increase in prepaid expenses (8,000)Decrease in accounts payable (13,000)Increase in accrued expenses 6,000Decrease in other current liabilities (6,100)

Net cash flows from operating activities 14,900Cash flows from investing activities

Purchase of long-term investments (111,000)Sale of equipment 46,000

Net cash used in investing activities (65,000)Cash flows from financing activities

Payments on long-term debt (72,000)Proceeds from restricted contribution 119,000

Net cash used in financing activities 47,000Net increase (decrease) in cash and cash equivalents (3,100)Cash and cash equivalents at beginning of the year 62,000Cash and cash equivalents at end of the year $58,900

Items requiring separate disclosure include:

• Retirement of debt by issuing equity securities.

• Conversion of preferred stock to common stock.

• Leasing of assets in a capital lease transaction.

NoncashInvesting and Financing

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Summary• Examined have been the 4 basic financial statements which

comprise a picture of the financial health of a non profit, business oriented health care entity.

• The four basic financial statements are:

• Balance Sheet

• Statement of Operations

• Statement of Changes in Net Assets

• Statement of Cash Flows