1. Chapter 9
Financial Statements

2. Learning Objectives Understand the four financial statements
Balance sheet
Statement of operations
Statement of changes in net assets
Statement of cash flows
Footnotes

3. Understanding Financial Statements
Balance Sheet
presents a record of an organization’s assets, liabilities, and net assets (equity) at a specific point of time. In essence, it is a financial snapshot of the organization at a certain date.
Statement of Operations (Income Statement or Statement of Revenues and Expenses)
details the organization’s revenues and expenses during the accounting period – typically, one year.

4. Understanding Financial Statements
Statement of Changes in Net Assets
lists how equity changed during the period
Statement of Cash Flows
describes how cash was generated and used
Notes to the Financial Statements (Footnotes)
provide detail on the organization’s structure, accounting practices, and financial standing. Not considered to be part of the four primary financial statements.

5. Understanding Financial Statements
Balance Sheet
A. Current Assets
Cash
Cash Equivalents
Accounts Receivable
Inventory/Supplies
Prepaid Expenses
Limited use Current Assets
Other Current Assets
B. Assets Whose Use is Limited
1. By Board for Capital
2. Malpractice Funds
3. Bond Trustee
Current Assets:
Assets that are expected to be exchanged for cash or consumed during the operating cycle of the entity (or one year, whichever is longer)
Cash & Cash Equivalents: Cash consists of coin, currency, and available deposited funds at banks. Cash equivalents include savings accounts, certificates of deposit, and other temporary marketable securities.
Accounts Receivable:
Represent legally enforceable claims on customers for prior services or goods.
Assets Whose Use is Limited:
Typically, cash and investments that can only be spent for specific purposes

6. Understanding Financial Statements
Property and Equipment: represent investment in tangible, permanent assets; they are sometimes referred to as the capital assets (or net fixed assets) of the organization.
C. Property and Equipment
1. Land and Improvements
2. Buildings and Equipment
3. Construction in Progress
4. Allowance for Depreciation
D. Other Assets
1. Investments in Affiliated Companies
2. Goodwill
3. Debt Issuance Costs
Allowance for (Accumulated) Depreciation: represents the accumulated depreciation taken on the asset to the date of the financial statement – this is different than “depreciation expense” on the Income Statement.
Goodwill:
represents the difference between the price paid to acquire another entity and the fair market value of the acquired entity’s assets, less any related obligations or liabilities

7. Understanding Financial Statements
E. Current Liabilities
1. Current Installments of LTD
2. Accounts Payable
3. Accrued Expenses
4. Construction Payable
5. Estimated Third-Party Settlements
6. Deferred Revenue
F. Non-Current Liabilities
1. Long-Term Debt
2. Deferred Revenue
3. Estimated Malpractice Costs
G. Net Assets
Current Liabilities:
obligations that are expected to require payment in cash during the coming year or operating cycle, whichever is longer
Current Installments (Portion) of LTD:
represents the amount of principal that will be repaid on the indebtedness within the coming year
Long-term Debt:
represents the amount of long-term indebtedness that is not due in the next year
Net Assets (Equity):
the difference between assets and the claim to those assets by third parties or liabilities

8. Understanding Financial Statements
Balance Sheet Example – Harris Memorial Hospital & Harris Community Foundation
December 31, 20X7
December 31, 20X6
Assets
Current assets:
Cash and cash equivalents
$ 82,815
$ 59,696
Assets limited as to use, current portion
5,327
5,088
Accounts receivable:
Patients, less allowance for doubtful accounts ($25,302 in 20X7 and $23,014 in 20X6)
70,025
59,939
Other
28,990
24,995
Supplies
7,078
6,663
Total current assets
194,235
156,381
Assets limited as to use:
For donor-restricted purposes
84,440
67,826
Board designated for specific purposes
382,835
378,413
Held by trustees under bond agreements
51,038
25,937
518,313
472,176
Less current portion
512,986
467,088
Property and equipment, net
563,349
458,829
Other assets
34,476
34,302
Total assets
$ 1,305,046
$ 1,116,600
Discussion:
What are doubtful accounts?
Discussion:
How do we identify unrestricted cash and investments?
Discussion:
How do we identify accumulated depreciation?

9. Understanding Financial Statements
Balance Sheet Example – Harris Memorial Hospital & Harris Community Foundation
December 31, 20X7
December 31, 20X6
Liabilities and net assets
Current liabilities:
Accounts payable
$ 32,572
$ 24,631
Accrued expenses and other liabilities
58,878
53,725
Due to third-party payors
7,380
12,633
Current maturities of long-term debt
4,692
5,908
Total current liabilities
103,522
96,897
Long-term debt, less current maturities
439,597
332,354
Contingent professional liabilities
33,260
48,487
Due to broker
15,128
19,608
Other liabilities
20,713
5,298
Postretirement benefit obligation, other than pensions
8,207
7,694
Total liabilities
620,427
510,338
Net assets:
Unrestricted
600,179
538,436
Temporarily restricted
55,213
40,393
Permanently restricted
29,227
27,433
Total net assets
684,619
606,262
Total liabilities and net assets
$ 1,305,046
$ 1,116,600
Discussion:
Where can additional information regarding long-term liabilities be found?

10. Understanding Financial Statements
Statement of Operations
A. Total Revenue
1. Net Patient Service Revenue
2. Other Revenue
B. Expenses
Wages & Benefits
Supplies
Depreciation
Interest
Bad Debts
Other
C. Other Income Sources
Net patient service revenue:
The revenue from patients after deductions from gross price (charges).
Depreciation:
A non-cash expense that represents the financial value an asset loses over some period of time (usually defined by the asset’s useful life)
Interest:
Expense paid as part of debt financing
Bad Debts:
The amount of charges that will not be collected from patients from whom payment was expected
Other income:
Examples include income on endowments, tax support, income on reserves, and gains and losses from sales of properties

11. Understanding Financial Statements
Statement of Operations Example – Harris Memorial Hospital & Harris Community Foundation
December 31, 20X7
December 31, 20X6
Unrestricted revenues and other support:
Net patient service revenue
$ 829,005
$ 774,662
Other operating revenue
27,055
29,334
Total operating revenue
856,060
803,996
Operating expenses:
Salaries and wages
$ 371,449
$ 329,668
Employee benefits
81,532
77,231
Supplies and purchased services
228,244
225,497
Advertising
3,072
2,376
Staff enrichment
10,767
8,591
Occupancy cost
14,346
13,442
Depreciation
44,392
41,627
Interest
10,974
6,145
Provision for bad debts
55,851
57,975
Operating expenses
820,627
762,552
Excess of revenue over expenses
35,433
41,444
Continued on next slide…
Discussion:
Is net patient revenue the full charge amount to patients?
Discussion:
What is the difference between doubtful accounts in A/R in the Balance Sheet and bad debt expense?

12. Understanding Financial Statements
Statement of Operations Example – Harris Memorial Hospital & Harris Community Foundation
December 31, 20X7
December 31, 20X6
Continued from previous slide…
Excess of revenue over expenses
35,433
41,444
Nonoperating gains (losses):
Contributions, gifts, and bequests
3,189
1,318
Net assets released from restrictions for research expenditures
14,070
14,474
Research, education, and other nonopearting expenses
(22,980)
(24,773)
Change in interest rate swap value and put agreements
1,578
9,397
Investment income
30,453
18,402
26,310
18,818
Excess of revenues and gains over expenses and losses
$ 61,743
$ 60,262
Discussion:
If I need to use “net income” for a financial ratio, which line should I use?

13. Understanding Financial Statements
Statement of Changes in Net Assets
A. Basic Equation
Ending
Balance
Beginning
Balance
Transfers
Out
Transfers In
= Income + -

14. Understanding Financial Statements
Statement of Changes in Net Assets Example – Harris Memorial Hospital & Harris Community Foundation
December 31, 20X7
December 31, 20X6
Unrestricted net assets:
Excess of revenues and gains over expenses and losses
$ 61,743
$ 60,262
Net assets released from restrictions for capital expenditures -
119
Cumulative effect of change in accounting principle
(3,943)
Increase in unrestricted net assets
61,743
56,438
Temporarily restricted net assets:
Contributions, gifts, and bequests
20,435
15,512
Investment income
8,455
3,972
Net assets released from restrictions for research expenditures
(14,070)
(14,474)
(119)
Increase in temporarily restricted net assets
14,820
4,891
Permanently restricted net assets:
1,794
3,218
Increase in permanently restricted net assets
Net assets at beginning of year
606,262
541,715
Net assets at end of year
$ 684,619
$ 606,262
Discussion:
What led to the organization’s largest changes in net assets?

15. Understanding Financial Statements
Statements of Cash Flows
A. Operating Activities
B. Investing Activities
C. Financing Activities

16. Understanding Financial Statements
Statement of Cash Flows Example – Harris Memorial Hospital & Harris Community Foundation
December 31, 20X7
December 31, 20X6
Operating Activities
Increase in net assets
$ 78,357
$ 64,547
Adjustments to reconcile increase in net assets to net cash provided by operating activities:
Change in net unrealized gains and losses on investment securities
(26,358)
11,432
Cumulative effect of change in accounting principle -
(3,943)
Depreciation
44,392
41,627
Gain on sale or disposal of assets, net
(6,119)
Provision for bad debts
55,851
57,975
Change in interest rate swap value and put agreements
(1,578)
(9,397)
Changes in operating assets and liabilities:
Assets limited as to use
(19,779)
(14,274)
Accounts receivable
(65,937)
(51,251)
Other assets
(7,071)
(43)
Supplies
(415)
840
Accounts payable
7,941
10,613
Accrued expenses and other liabilities
20,568
8,430
Due to third-party payors
(5,253)
(4,877)
Contingent professional liabilities
(15,227)
3,743
Postretirement benefit obligation, other than pensions
513
456
Net cash provided by operating activities
59,885
115,878
Discussion:
Why do you think assessing cash flow is important?

17. Understanding Financial Statements
Statement of Cash Flows Example – Harris Memorial Hospital & Harris Community Foundation
December 31, 20X7
December 31, 20X6
Investing Activities
Property and equipment acquired
(142,793)
(159,943)
Cash used in investing activities
Financing Activities
Repayment of long-term debt
(177,294)
(5,545)
Proceeds from borrowing
283,321
57,614
Net cash provided by financing activities
106,027
52,069
Net increase in cash and cash equivalents
23,119
8,004
Cash and cash equivalents at beginning of year
59,696
51,692
Cash and cash equivalents at end of year
$ 82,815
$ 59,696
Discussion:
Did the organization improve its overall cash position from 20X6 to 20X7?

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

19. Understanding Financial Statements
Footnotes Example – Harris Memorial Hospital & Harris Community Foundation
Property, Plant and Equipment Footnote
December 31, 20X7
December 31, 20X6
Land and improvements
$ 26,945
$ 26,610
Buildings and improvements expenditures
447,897
265,965
Fixed and movable equipment
469,441
427,882
Construction-in-progress
112,880
189,807
1,057,163
910,264
Less accumulated depreciation
493,814
451,435
$ 563,349
$ 458,829
Discussion:
If I need to get accumulated depreciation for a financial ratio calculation, what value do I use?