The “ABC’s” of Accounting

A Special Thank You to: Dr. David M. Yousem, M.D., M.B.A. Professor, Department of Radiology Vice Chairman of Program Development Director of Neuroradiology Johns Hopkins Hospital for allowing the use of his material/content in this presentation Dr. Yousem’s online lecture series can be viewed at: =7e18b7d5-9c63-487e-aaf1-77a86f83b011 Dr. Yousem’s project was funded through an RSNA Educational Grant

Accounting Overview Regulatory Agencies The Balance Sheet Income Statement Statement of Cash Flows Budgets Accounting Entities Insurance

REGULATORY AUTHORITIES Financial Accounting –Financial Accounting Standards Board (FASB) Tax Accounting –Internal Revenue Service (IRS)

Financial Accounting Standards Board (FASB) Has authority to set financial accounting standards –Recognized by: Securities & Exchange Commission (SEC) American Institute of Certified Public Accountants (AICPA) Standards = Generally Acceptable Accounting Principles (GAAP)

GAAP Hierarchy A. Statement of Financial Accounting Standards (FASB) –Greatest authority B. Technical Bulletins (FASB) C. Consensus Position. Emerging Issues Task Force (FASB) D. Accounting Interpretations (FASB) E. Statement of Financial Accounting Concepts –Least authority

Bookkeeping ≠ Accounting Bookkeeping –Chronological documentation of economic events for later use by an accountant. Accounting –Integrating and “making sense” of bookkeeping information and preparation of various financial reports to assess financial performance.

THE BALANCE SHEET = Statement of financial condition Composed of two columns that balance and equal each other: Assets = Liabilities + Retained Earnings Assets and Liabilities are each divided into two sections: –Current “An asset or liability that can be liquidated or will come due in the next 12 months.” –Noncurrent Same as current, except ranges past the next 12 months.

Importance of Ratios Working Capital = Current Assets ÷ Current Liabilities –Ideally a ratio of 2:1 or higher is sought –Measure of how liquid a company is… The more money and less liability ~ the better off the company

Assets (Cash + Accounts Receivable + Inventory) Quick Assets Ratio (Asset Test Ratio) = (Current Assets-Inventories) ÷ Current Liabilities –Important ratio when a company has a lot of inventory included on the balance sheet –Inventory is the least liquid current asset Accounts Receivable –Amounts due from patients/insurance companies Other assets –Deferred: Payments now for next year’s expenses –Intangible Assets –Fixed Assets: Property, plant, and equipment

Liabilities Debt + Accounts Payable + Accrued Expenses + Stockholders Equity –Debt Typically, real estate and equipment purchases in radiology practices –Accounts Payable Amounts owed to vendors/suppliers –Accrued Expenses Items expensed but not yet paid for. –e.g. Taxes, Salaries, Legal Fees

INCOME STATEMENT Summary of income and expense items for a given period of time –Contrary to Balance Sheet, which looks at a specific date Bottom Line (Profit) = (Income – Expenses) –Other names: EBT (Earnings before taxes) EBITDA (Earnings before interest, taxes, depreciation, & amortization)

STATEMENT OF CASH FLOW Summary of inflow and outflow during a specified period Critical to assessing the immediate needs of the company –Primarily relating to liquid assets Balance Sheet + Income Statement + Statement of Cash Flow –Basic components to financially evaluate a business

BUDGETS Important to establish benchmarks for a company to compare actual performance “Variances” = deviations in the budget “Red Flags” = Large deviations/fluctuations Budgeting for internal use only Need both annual and long-term budgets –Useful models: Rolling forecasts- prior year plus percentage increase –Allow performance evaluation of different segments within the company

BUDGETS Profit Margin = Operating Income ÷ Revenues Most budgets forecast to operating income (profit) –Also called EBIT (Earnings before interest and taxes) Revenue is proportional to volume Variable expenses change in proportion to revenue –Fixed expenses to be considered: –Rent, Salaries, Benefits, Insurance Depreciation –Must be incorporated in budget, with a tax benefit if deducted on accelerated basis –Based on IRS general depreciation systems

ACCOUNTING ENTITIES Three entities in radiology private practice –C corporation –Partnership/pass-through entity Partnership S corporation Limited liability company (LLC) –Sole proprietorship

C Corporation Regular corporation –File annual income tax –Pay tax on taxable income Note: THE STOCKHOLDERS PAY ANOTHER TAX ON DIVIDEND DISTRIBUTIONS (Double Taxation)

Partnership/Pass-through Entities File annual tax returns, but do NOT pay income taxes Each return issues a Form K-1 to each investor –Reports the percentage share of each income & deduction for each investor Investors report their share of income and deductions on their respective tax returns Essentially, taxation only at investor level

S Corporation Must meet certain criteria –Can only have a single class of stock (no common or preferred stock) –75 or less stockholders –Shareholders have limited liability Only their investment is at risk If sued, the assets of the corporation, not the investors’, are available for collection.

Partnership Similar to S Corporation Any number and types of partners General Partnership –All partners are general and all are fully liable for partnership debts Partners may have to contribute additional assets to satisfy debts Limited Partnership –One general partner and numerous limited partners Limited partners liable for debt only up to their investment

LLC – Limited Liability Companies Hybrid of C corporation & partnership Can be taxed as either C corp or partnership if >1 partner If one member only, can be taxed as C corp or as “disregarded entity” –Report income and deductions on personal tax return No Form K-1 Members liable only for their extent of their investment –Similar to S corp No requirement that member has general liability for LLC debts

State-dependent restrictions In many states, professional practices not allowed to organize as LLC’s, partnerships, or C corporations –Separate entities Professional Associations (PA) Professional Corporations (PC) Professional Limited Liability Companies (PLLCs) –Must be licensed by state authority (medical board) –Taxed like C corporation or pass through entity –Can protect each investor from the liability of the other members malpractice

INSURANCE In addition to malpractice insurance…. –Umbrella Policy –Disability Insurance –Key-man Insurance Can fund any buyouts in multi-partner practices Life insurance is paid out to the practice, which is then used to purchase the deceased doctor’s interest in the practice from the heirs

Personal Life Insurance Consider establishing an Irrevocable Life Insurance Trust (ILIT) –Usually insurance benefits pass tax-free to beneficiaries, but proceeds are included in your gross estate, thus subject to income tax –If policy purchased and owned by ILIT, insurance proceeds should not be included in your estate, thus not taxed Also, deducting disability insurance premiums is generally not recommended, despite their short-term tax savings –If they are not deducted, upon payment they will not be taxed

Additional Resources/Reading ACR Residents & Fellow Section on Dollars & Sense Radiology Business Practice: How to Succeed. Ed. David M. Yousem & Normal Beauchamp, Jr. Saunders/Elsevier 2008.

Credit and Additional Resource All information herein is based on the book, “Radiology Business Practice: How to Succeed” (Ed. David M. Yousem & Norman J. Beauchamp, Jr)