1. Financial Accounting Balance Sheet and Income Statement Analysis December 2–5, 2017

2. Learning Objective
Utilizing and interpreting the different types of financial statements and ratio analysis. 2

3. What Financial Information Do You Already Understand?
GAAP = Generally Accepted Accounting Principles. These are our standard operating procedures! 3

4. Order of Battle
Understanding the concept of Generally Accepted Accounting Principles and Financial Reports.
Understanding the difference between Cash and Accrual basis of Accounting.
3. Reviewing and analyzing the Financial Statements;
Income Statement
Balance Sheet
Cash Flow
4. Ratio Analysis
DuPont Analysis
Liquidity
Profitability
Asset Management
Debt Management 4

5. Content of an Organization’s Annual Audit Report
The Management Letter
The Financial Statements:
Balance Sheet
Income Statement
Statement of Stockholders’ Equity or Net Assets
Statement of Cash Flows
The Footnotes
The Auditor’s Report
Sarbanes-Oxley 5

6. Order of Battle
Understanding the concept of Generally Accepted Accounting Principles and Financial Reports.
Understanding the difference between Cash and Accrual basis of Accounting.
3. Reviewing and analyzing the Financial Statements;
Income Statement
Balance Sheet
Cash Flow
4. Ratio Analysis
DuPont Analysis
Liquidity
Profitability
Asset Management
Debt Management 6

7. Which Basis of Accounting is Used?
Cash basis
Financial effects are recorded in financial statements when cash is received or paid. Usually with small Physician Practices.
Accrual basis
Financial effects are recorded without regard to the timing of the cash flows. Transactions are counted when the services occur, regardless of when the money for them (receivables) is received. In other words, income is counted when the service occurs, and expenses are counted when the services are delivered.
You don't have to wait for the money. All hospitals use accrual accounting. 7

8. Physician’s on Hold, Inc.
Cash Balance
Physician’s on Hold, Inc.
What is the Cash Balance at the end of the year? 8

9. Order of Battle
Understanding the concept of Generally Accepted Accounting Principles and Financial Reports.
Understanding the difference between Cash and Accrual basis of Accounting.
3. Reviewing and analyzing the Financial Statements;
Income Statement
Balance Sheet
Cash Flow
4. Ratio Analysis
DuPont Analysis
Liquidity
Profitability
Asset Management
Debt Management 9

10. The Income Statement
The income statement summarizes an organization’s collections (revenues) and expenses usually over 12 months.
Key figures include net income, gross profit and operating income.
Income and expenses help investors determine what makes a company profitable. 10

11. Depreciation Expense What is it?
A systematic expensing of the cost of a tangible plant asset as time passes
Management estimates the useful life of the asset
Purpose is to match the cost with the related revenue
Straight-line depreciation
A method of expensing an equal portion of the asset’s cost each year
Depreciation expense = Cost ÷ Useful life 11

12. Great Forks Hospital
The Hospital reported net income for 2015 of $2.4 million on total revenue of $30 million. Depreciation expense totaled $1.0 million.
A) What are Total Expenses for 2015?
B) What are Total Cash Expenses for 2015?
C) What was the Hospital’s 2015 Cash Flow? 12

13. Lets Discuss the Following Income Statements
Hill Physicians Medical Group, Inc.
Deaconess Health System 13

14. Is Net Income Equal to Your Cash?14

15. The Balance Sheet
The balance sheet reports the financial position at a point in time (end of the quarter or year).
The balance sheet is divided into three major categories:
Assets
Liabilities
Net Assets 15

16. The Balance Sheet (B/S)
Assets - represent future benefit to the company, and are classified in order of liquidity (current assets; property, plant and equipment; long-term investments and intangibles)
Liabilities - represent obligations of the company, and are classified according to payment date (current liabilities, long- term liabilities)
Net Assets - represents the residual claims of the owners, and is classified based on source (contributed capital and retained earnings, or fund balance) 16

17. Assets = Liabilities + Net Worth
Balance Sheet
Assets = Liabilities + Net Worth
Assets
Current Assets
Intangible Assets
Property Plan & Equipment
Long Term Investment
Liabilities & Net Assets
Current Liabilities
Long Term Liabilities & Debt
Net Assets 17

18. B/S Assets: Current Assets
Current Assets include:
Cash: checking and savings accounts; petty cash.
Short-term investments: investments in stocks and bonds of other companies.
Accounts receivable: amounts owed to a company from its customers.
Inventory: products on hand designated for sale to customers.
Prepaid expenses: amounts paid for future expenses. 18

19. Any others that you can think of?
B/S Assets: Intangible Assets
Intangible Assets are assets that CANNOT be seen, touched or counted. Typical intangible assets in healthcare are:
Software
Restrictive agreements/covenants
Goodwill
Trained employees
Reputation
Bed licenses
Medical records
Regulatory approvals
Any others that you can think of? 19

20. B/S Assets: Property, Plant and Equipment
Property, Plant, and Equipment are assets that are used in the production of goods and services. These productive assets are long-term in nature, and include the following:
Land: property upon which the productive facilities are located.
Building: the physical structure of the company’s operations.
Machinery and Equipment: include operating machinery (MRI), vehicles, computers, copy machines, etc.
Accumulated Depreciation: accumulated depreciation is the total depreciation for a fixed asset that has been charged to expense since that asset was acquired and made available for use. 20

21. B/S Assets: Long-term Investments
Long-Term Investments & Intangibles are assets acquired by the company to provide long-term benefits to the company. They include:
Long-term notes receivable owed to the company (from customers or others).
Investments in stock of other companies: held for expectation of dividends and/or stock price increase. 21

22. Dallas Hospital Organization
Dallas Hospital Organization (DHO) purchased equipment on January 1, for $290,000 with an expected scrap value of $30,000 and estimated useful life of five years.
Using straight line depreciation, what is the depreciation expense for 2015
What is the accumulated depreciation after 2016?
After three years, DHO decides to sell the equipment for $130,000 what is the gain or loss on the sale? 22

23. B/S Liabilities: Current Liabilities
Current Liabilities are obligations expected to be paid (or services expected to be performed) within the next year or operating cycle. The elimination of current liabilities requires the use of current assets (most commonly cash). Examples include:
Accounts payable
Wages payable
Interest payable
Short-term notes payable
Current maturities of long-term debt
Deferred (unearned) revenues 23

24. B/S Liabilities: Long-term Liabilities
Long-Term Liabilities are obligations expected to require payments beyond the current year. Examples of long-term liabilities include:
Notes payable: amounts owed to banks and other creditors beyond the current year.
Mortgage payable: amounts owed to mortgage company beyond the current year.
Bonds payable: amounts owed to investors holding bond investments issued by the company, where payments of principal and interest are beyond the current year. 24

25. Let’s Discuss the Following Balance Sheets
Hill Physicians Medical Group, Inc.
Deaconess Health System 25

26. Cash Flow Business Activities & Purpose
Business activities (CASH FLOW ) are reflected in financial statements; business activities include:
Operating Activities – selling goods and services.
Investing Activities – acquisition and sale of productive assets.
Financing Activities – issue and retirement/repayment of liabilities and equity.
A Statement of Cash Flows:
shows the relationship of net income to changes in cash balances & helps to predict future cash flows.
evaluates how management generates and uses cash.
determines a company’s ability to pay present and future obligations, including debts when they are due. 26

27. Typical Activities Affecting Cash
Cash Inflows
Operating Activities
net income
depreciation
reduction in current assets
increase in current liabilities
Investing Activities
sale of long-term securities
sale of property, plant & equipment
Financing Activities
borrowing from banks and other creditors
charitable contributions
Cash Outflows
Operating Activities
operating loss
increase in current assets
decrease current liabilities
Investing Activities
purchase of long-term securities
purchase of property, plant and equipment
Financing Activities
loan repayments
long-term debt repayments
dividend payments (for-profit Hospitals) 27

28. Lets Discuss the Following Cash Flow Statements
Hill Physicians Medical Group, Inc.
Deaconess Health System 28

29. Order of Battle
Understanding the concept of Generally Accepted Accounting Principles and Financial Reports.
Understanding the difference between Cash and Accrual basis of Accounting.
3. Reviewing and analyzing the Financial Statements;
Income Statement
Balance Sheet
Cash Flow
4. Ratio Analysis
DuPont Analysis
Liquidity
Profitability
Asset Management
Debt Management 29

30. Du Pont Analysis
Du Pont analysis summarizes and highlights a business’s financial condition.
It is based on the fact that ROE can be expressed as the product of three ratios:
Total margin (expense control)
Total asset turnover (asset utilization)
Equity multiplier (debt utilization) 30

31. x x = ROE TA DuPont Model Example Equity x x = ROE
Multiplier
Total
Margin TA
Turnover
x x = ROE TA TE NI
Rev
Rev TA
2012: % x x = 2.43%
2013: % x x = 7.98%
Ind. Avg.: % x x = 8.39%
What does it all mean? 31

32. DuPont Analysis for: Hill Physicians Medical Group, Inc. 2016 & 2015
Deaconess Health System 32

33. Interpretation of Financial Statements
Liquidity
Profitability
Debt Management
Asset Management 33

34. Comparisons Within the Industry
Financial accounting numbers can also be made more meaningful if they are compared to those of similar hospitals.
Comparison of financial accounting numbers with hospital averages is also helpful. 34

35. Liquidity Ratios
Liquidity Ratios are ratios that come off the Balance Sheet and hence measure the liquidity of the company at a particular time.
These ratios are important in measuring the ability of a company to meet both its short term and long term obligations. 35

36. Liquidity Ratios Current Ratio = Current Assets Current Liabilities
Days Cash on Hand = Cash Operating Exp-Depreciation Expr
Avg. Age of Plant = Accumulated Depreciation
Depreciation Expense 36

37. Profitability Ratios
These ratios are designed to measure a hospital’s earnings power, to generate funds for future reinvestment.
Net income, the primary measure of the overall success of a hospital, is compared to other measures of financial activity or condition to assess performance as a percent of some level of activity or investment. 37

38. Profitability Ratios
Deductible Ratio = Deductions Gross Patient Revenue
Total Margins = Net Income Total Revenue
Return on Assets = Net Income Total Assets
Return on Equity = Net Income Total equity 38

39. Debt Management Ratios
Debt Management Ratios attempt to measure the firm's use of Financial Leverage and ability to avoid financial distress in the long run. These ratios are also known as Long-Term Solvency Ratios. 39

40. Debt Management Ratios
Debt Ratio = Total Debt Total Assets
LT. Debt to Equity = LT. Debt Total Equity
Times Interest Earned = NI + Interest Expr Interest Expr.
Cash Flow Coverage = NI + Interest Total Debt Payments 40

41. Asset Management Ratios
Asset management ratios measure the ability of assets to generate revenues or earnings. They also compliment our liquidity ratios. 41

42. Asset Management Ratios
Current Asset Turnover = Collections (Revenue) Current Assets
Fixed Asset Turnover = Collections Fixed Assets
Average Collection Period = Accts Receivable (Sales/365 Days)
Average Payment Period = Accts Payable X Purchases 42

43. Ratios & Calculations
Ratio
Calculation
Current Ratio (L)
Current Assets / Current Liabilities
Days in Accounts Receivable (L)
Net Accounts Receivable / Net patient Revenue per Day
Days Cash on Hand (L)
Cash / (Operating Expenses less Depreciation / 365)
Total Margin (P)
Excess of Revenues over Total Expenses / Total Revenue
Return on Equity (P)
Excess of Revenues over Total Expenses / Net Assets
Average Age of Plant (AM)
Accumulated Depreciation / Depreciation Expense
Debt Financing Percent (DM)
Total Liabilities / Total Assets
Fixed Asset Turnover (AM)
Total Revenue / Net Plant, Property & Equipment
Long-Term Debt to Equity (DM)
Total Long-Term Debt / Net Assets
Cash Flow to Total Debt (DM)
Excess of Revenues over Expenses + Depreciation / Total Long-Term Debt
% Deductible (P)
Total Patient Revenue – Net Patient Revenue / Total Patient Revenue
(L) Liquidity (P) Profitability (AM) Asset Management (DM) Debt Management 43

44. Ratios & Descriptions Ratio Description 44 Current Ratio
Measures the hospital’s ability to meet its current liabilities with cash generated by its current assets. A ratio of 1.0 or higher indicates that all current liabilities could be adequately covered by current liabilities.
Days in Accounts Receivable
Measures the average number of days in the collection period. A larger number of days represents cash that is unavailable for use in operations.
Days Cash on Hand
The number of days of expenses that the hospital can currently cover with its available cash.
Total Margin
Measures the overall profitability of the hospital using both operating and non-operating surplus (loss).
Return on Equity
Expression of net income relative to total equity.
Average Age of Plant
The average age of property, plant and equipment owned by the hospital.
Debt Financing Percent
Measures relationship of total debt to assets.
Fixed Asset Turnover
Provides an indication of the efficiency with which the hospital uses its fixed assets to generate revenues.
Long-Term Debt to Equity
Measures the hospitals debt burden and its ability for additional borrowing.
Cash Flow to Total Debt
The amount of cash flow available to service all debt. The lower the number, the higher the likelihood that the hospital will be unable to meet debt payments of interest and principal and the higher the likelihood of violating any debt covenants.
% Deductible
Measures the proportion of total patient charges that are given up in discounts and allowances. 44

45. Other Analytical Techniques
In addition to ratio and Du Pont analyses, there are 3 other commonly used analytical techniques.
In common size analysis, all income statement items and balance sheet accounts are expressed as percentages.
The process of comparing a business’s ratios to selected standards is called benchmarking.
In percentage change analysis, year-to-year changes in income statement items and balance sheet accounts are expressed as percentages.
What is the value of these techniques? 45

46. Lets put Together Ratio Analysis for
Hill Physicians Medical Group, Inc.
Deaconess Health System 46

47. Healthcare Financial Detective You Decide47

48. Van Nuys Community Hospital Assessing Hospital Performance48

49. River Community Hospital Assessing Hospital Performance49

50. Putting it All Together50