Financial Management of Health Care Organizations An Introduction 4th edition, Zelman

1. Health Care
Financial Statements
Chapter 2

2. Learning Objectives
• Identify basic financial statements for health care entities
• Read basic financial statements

3. 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

4. Generally Accepted Accounting
Principles
Financial accounting practice is governed by
concepts and rules known as generally accepted
accounting principles (GAAP).
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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5. 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.
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Time period assumption presumes
that the life of a company can be
divided into time periods, such as
months and years.

6. Setting Accounting Principles
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.
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.
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7. 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).

8. Statements used in Not-for-Profit
Health Care Entities
• Balance sheet
• Statement of Operations
• Statement of Changes in Net Assets
• Statement of Cash Flows

9. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. Net Assets
• Remaining assets after deducting its liabilities
• 3 classes:
Permanently restricted
Temporarily restricted
Unrestricted
May also include: non-controlling ownership interest in
subsidiaries

18. • 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.

19. • 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

20. • 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

21. 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

22. Solution:
Stone Hospital Balance Sheet
September 30, 20X1
9/30/20X1 9/30/20X1
Current assets
Cash $6,000,000
Net accounts receivable 12,700,000
Inventory 5,300,000
Total current assets 24,000,000
Gross 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 liabilities
Accounts payable $8,300,000
Accrued expenses 5,200,000
Total current liabilities 13,500,000
Long-term debt 22,500,000
Total liabilities 36,000,000
Net assets:
Total net assets 24,500,000
Total liabilities and
net assets $60,500,000

23. 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

24. Solution:
Ray Hospital
Balance Sheet
September 30, 20X1
Current assets
Cash $8,000,000
Net accounts receivable 15,500,000
Supplies 3,000,000
Total current assets 26,500,000
Gross 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 liabilities
Accounts payable $7,000,000
Accrued expenses 6,000,000
Total current liabilities 13,000,000
Long-term debt 45,000,000
Total liabilities 58,000,000
Net assets:
Total net assets 33,500,000
Total liabilities and
net assets $91,500,000

25. 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

26. 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

27. 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

28. 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

29. Snead Hospital
Statement 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

30. 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

31. Moore Hospital
Statement of Operations
For the Year Ended September 30, 20X1
9/30/20X1
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)

32. 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 $70,000
Provision for bad debts $8,000
Labor expense $470,000
Accumulated depreciation $450,000
Ending / beginning balance, permanently
restricted net assets $35,000
Ending balance, unrestricted net assets
$456,000

33. solution
Exton Outpatient Center
Balance Sheet
September 30, 20X1
Current assets
Cash $61,000
Net accounts receivable 350,000
Prepaid expenses 8,000
Total current assets 419,000
Gross plant, property,
and equipment 900,000
(less accumulated
depreciation) (450,000)
Net plant, property,
and equipment 450,000
Total assets $869,000
Current liabilities
Accounts payable $23,000
Wages Payable 37,000
Total current liabilities 60,000
Long-term debt 270,000
Total liabilities 330,000
Net 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

34. 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

35. Question 6:
Insurance expense $55,000
Cash $61,000
Patient revenues (net of
contractuals ) $1,100,000
Net accounts receivable $350,000
Ending balance, temporarily
restricted net assets $48,000
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
Depreciation expense $33,000
General expense $255,000
Transfer to parent corporation
$55,000
Beginning balance, unrestricted net
assets $275,000
Accounts payable $23,000
Beginning balance, temporarily
restricted net assets $70,000
Provision for bad debts $8,000
Labor expense $470,000
Accumulated depreciation $450,000
Ending / beginning balance,
permanently restricted net assets
$35,000
Ending balance, unrestricted net
assets $456,000

36. 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 65,000
Insurance 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 assets
Excess of revenues over expenses
236,000
Transfer to parent corporation (55,000)
Change in unrestricted net assets
181,000
Temporarily restricted net assets
Net assets released from temporary restriction
(22,000)
Change in temporarily restricted net assets
(22,000)
Permanently restricted net assets
Change in permanently restricted net assets 0
Increase in net assets 159,000
Beginning balance, unrestricted net assets
275,000
Beginning balance, temporarily restricted net
assets 70,000
Ending / 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

37. 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

38. 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

39. Operating Activities C 1
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
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40. Investing Activities C1
Inflows
• Selling long-term productive
assets
• Selling equity investments
• Collecting principal on loans
• Other
Outflows
• Purchasing long-term
productive assets
• Purchasing equity
investments
• Purchasing debt investments
• Other
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41. Financing Activities C 1
Inflows
• Issuing its own equity
securities
• Issuing bonds and notes
• Issuing short- and long-term
liabilities
Outflows
• Pay dividends
• Purchasing treasury stock
• Repaying cash loans
• Paying owners’ withdrawals
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42. Question 7
Givens (in '000s):
Decrease in prepaid expenses $2,500
Payments on long-term debt ($7,000)
Cash and cash equivalents at beginning of the year $24,000
Increase in inventory ($3,300)
Increases in long-term debt $175,000
Decrease in accrued expenses ($2,400)
Change in net assets $6,500
Sale of long-term investments $31,000
Increase in other current liabilities $2,600
Depreciation $6,600
Payments on capital lease ($6,100)
Purchases of equipment ($177,000)
Increase in net account receivables ($50,000)
Increase in accounts payable $40,000

43. SunviewHospital
Statement of Cash Flows (in '000s)
For the Year Ended December 31, 20X1
12/31/20X1
Cash Flows from Operating Activities:
Change in net assets $6,500
Adjustments to reconcile change in net assets
to net cash provided by operating activities
Depreciation 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 2,500
Increase in accounts payable 40,000
Decrease in accrued expenses (2,400)
Increase in other current liabilities 2,600
Net cash flows from operating activities 2,500
Cash 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 175,000
Payments on capital lease (6,100)
Net cash used in financing activities 161,900
Net increase (decrease) in cash and cash equivalents 18,400
Cash and cash equivalents at beginning of the year 24,000
Cash and cash equivalents at end of the year $42,400

44. 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)

45. Hilltop Hospital
Statement of Cash Flows (in '000s)
For the Year Ended December 31, 20X1
12/31/20X1
Cash Flows from operating activities:
Change in net assets $12,000
Adjustments to reconcile change in net assets
to net cash provided by operating activities
Depreciation 43,000
(Increase) decrease in current assets:
Increase (decrease) in current liabilities
Increase in net account receivables (27,000)
Decrease in inventory 8,000
Increase in prepaid expenses (8,000)
Decrease in accounts payable (13,000)
Increase in accrued expenses 6,000
Decrease in other current liabilities (6,100)
Net cash flows from operating activities 14,900
Cash 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 47,000
Net increase (decrease) in cash and cash equivalents (3,100)
Cash and cash equivalents at beginning of the year 62,000
Cash and cash equivalents at end of the year $58,900

46. Noncash
Investing and Financing
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.
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47. 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