Generally Accepted Accounting Principles (GAAP) September 12, 2016 4:00 – 5:00 PM Amber Popek, CPA Senior Manager apopek@bkd.com

objectives Fundamentals of GAAP (Generally Accepted Accounting Principles) Interpretation of financial statement Key performance indicators

What is gaap? GAAP = Generally Accepted Accounting Principles Definition: Rules of accounting created by the Financial Accounting Standards Board (FASB) for use in the United States of America. Purpose: To ensure companies produce financial information that is useful to existing and potential users of the financial information in making decisions for or about the company. For financial information to be useful, it must possess two characteristics: 1) Relevance – makes a difference in decision making 2) Faithful representation – fully depicts the economic substance of business activities Why do we need GAAP? It ensures consistency in reporting and presentation of financials

Methods of accounting Cash Basis Accrual Basis Recording revenues when cash is received and recording expenses when cash is paid Does not accurately present the true financial picture of the company at a given time NOT allowed under GAAP Accrual Basis Recording revenues when earned and recording expenses when incurred, regardless of the timing of cash receipts collected or cash payments made More accurately reflects the financial position of the company at a point in time The only acceptable method of financial reporting under GAAP

Basic Gaap principles Revenue Recognition Principle Expense Recognition Principle Historical Cost Principle Consistency Principle Disclosure Principle

Fundamentals of accrual accounting Revenue Recognition Principle Revenues should be recognized when they are earned Once the company has fulfilled its obligation to the customer/patient by doing what it promises to do Typically this occurs at the point of delivery of goods or services Example Journal Entries If payment received at the If payment is not received at the time services are provided: time services are provided: DEBIT: Accounts Receivable DEBIT: Cash CREDIT: Revenue When payment is received: CREDIT: Accounts Receivable

fundamentals of accrual accounting Expense Recognition Principle (The “Matching Principle”) Expenses should be recognized in the same period that revenues with which they can be reasonably associated Example: RN salary expense should be recorded in the same period that revenue from the nursing visit is recorded Example Journal Entries To record nursing visit revenue (cash not received at time of service): To record RN salary expense: DEBIT: Accounts receivable DEBIT: Salary expense CREDIT: Revenue CREDIT: Accrued payroll

Other principles of gaap Historical Cost Principle Assets should be recorded at their actual cost, measured on the date of purchase Consistency Principle The same accounting methods of recording transactions should be used by a company from period to period Disclosure Principle A company’s financial statements should report enough information for the user to make informed decisions about the company

Accounting estimates Sometimes estimates are required in financial statements in order to record certain transactions when the value is uncertain Definition: An approximation in the amount recorded for a financial statement item when there is no precise means of measurement. Estimates are based on management’s judgment and specialized knowledge derived from past experience.

Allowance for doubtful accounts One common estimate in the health care industry is to estimate the net realizable value of accounts receivable Example Journal Entry To record estimate for AR allowance: DEBIT: Bad debt expense Since we know that some receivables never actually get collected  CREDIT: Allowance for doubtful accounts Gross Accounts Receivable Doubtful Accounts Less: Allowance for Net Accounts Receivable

Allowance for doubtful accounts A typical method to estimate for potentially uncollectible receivables is to reserve a percent of the aging “buckets” by payer Management should tailor these percentages based on historical collection and write-off experience Other methods of estimation are acceptable but should be consistent from period to period

Financial statement overview Balance Sheet (Statement of Financial Position) Reports the amount of assets, liabilities, and owner’s equity (for-profit) or net assets (non-profit) of an entity at a point in time. Asset = Liabilities + OE/NA

Balance sheet line items ASSETS Current Cash Investments Accounts Receivable Inventory Prepaid Expenses Non-Current Property and Equipment Intangible Assets

BALANCE SHEET LINE ITEMS LIABILITIES Current Accounts Payable Accrued Expenses Deferred Revenue Long-Term Notes Payable Capital Lease Obligation

Balance sheet line items For-Profit Not-For-Profit EQUITY NET ASSETS Stock Unrestricted Additional Paid-in-Capital Temporarily Restricted Retained Earnings (Deficit) Permanently Restricted Distributions

Financial statement overview Income Statement (Statement of Operations) Reports the revenues and expenses of an entity during a period of time. Revenues – Expenses = Net Income (Loss)

Income statement line items: revenues Operating Revenue Patient Service Revenue Less: Contractual Adjustments Net Patient Service Revenue Other Operating Revenue Non-Operating Revenue/Other Income Contributions/Donations Investment Return

Income statement line items: expenses Direct Expenses Indirect Expenses Expenses directly related to the care of patients Expenses not directly related to the care of patients Professional salaries Administrative salaries & benefits Benefits attributed to these salaries Rent & utilities Medical supplies Office supplies Mileage reimbursement/ Depreciation transportation for field staff Marketing Contract labor Bad debts

Performance measures How do we measure financial success? Gross Profit Net operating revenue – direct expenses Operating Income (Loss) Net operating revenue – operating expenses Net Income (Loss) Total revenue – total expenses EBITDA Earnings Before Income Tax, Depreciation & Amortization

Key performance indicators Profitability Gross Profit Margin = Gross profit / Net revenue Net Profit Margin = Net income (loss) / Net revenue Return on Assets = Net income (loss) / Total assets Return on Equity = Net income (loss) / Total equity Other Operating Indicators Labor as a % of Revenue A&G as a % of Revenue

Key performance indicators Cash Flow Days in AR = Accounts receivable / (Net revenue / 365) Days Payable Outstanding = Accounts payable / (Operating expenses /365) Days Cash On Hand = Cash balance / (Cash expenses / 365) Days Cash & Investments On Hand = Cash + Investments / (Cash expenses / 365) Cash Expenses = Operating expenses excluding non-cash expenses, such as depreciation, amortization, loss on sale of asset (no cash paid for these)

Key performance indicators Liquidity Current Ratio = Current assets / Current liabilities Working Capital = Current assets – Current liabilities Debt to Equity = Total liabilities / Total equity

Benchmark targets The table below includes certain suggested revenue cycle benchmark targets

summary

Questions?