Financial Analysis and Management Reporting

Steps in Financial Analysis

1) Establish facts of organization 2) Compare facts over time 3) Use perspective and judgement to make decisions

Accounts Payable

Amounts the hospital owes to suppliers and other trade creditors for merchandise and services purchased from them, but for which the hospital has not paid

Accounting Equation

Assets= liabilites + net assets

Statement of operations

Called income statement in for-profit HCOs Summarizes net revenues, expenses, and excess of net revenues over expenses (that is income before taxes in for-profit organization) Assets = Liabilities + Net Assets + (Net revenue - Expenses)

Long-term Liabilities

Economic obligation or debt that is due in more than one year, minus the amount that is due within one year

Current liabilities

Economic obligations or debts that are due in less than a year

Liabilities

Economic obligations, or debts, of the organization

Current assets

Economic resources that have a life or less than one year (i.e., the organization expect to consume them within one year) Listed in order of liquidity

Assets

Economic resources that provide or are expected to prodive benefit to the organization

Long-term investments

Economic resources that the hospital owns, such as corporate bonds and government securities, and intends to hold for more than one year

Ratio Analysis

Evaluation of an organization's performance by computing the relationships of important line items in the financial statements 4 kinds of ratios: 1) liquidity 2) profitability 3) activity 4) capital structure

Vertical Analysis

Evaluation of the internal structure of an organization by focusing on a base number and showing percentages of important line items in relation to the base number

Inventory/prepaid expenses

Expenditures made by the hospital for goods and services not yet consumed

Accrued expenses payable

Liabilities for expenses that have been incurred by the hospital, but for which the hospital has not yet paid, such as compensation to employees

Receivables, net or (Patients accounts receivable, net of allowances for contractual allowances, charity care, and bad debt)

Money due to the organization from patients and third parties for services already provided

Temporary Investments

Money placed in securities with maturities up to one year, such as commodities or options

Unrestricted net assets

Net assets that have not been externally restricted by donors or grantors, such as the excess of revenues to expenses from operations

Deferred Revenue

Revenue received by the hospital but not yet earned by the hospital, such as premium revenue from managed care organizations

Balance Sheet

Shows organization's financial position at a specific point int time, typically at the end of an accounting period. "Snapshot" Presents assets, liabilities, and net assets (or shareholders' equity in for-profit organizations) and it's relationships

Long-term debt, net of current portion

an economic obligation or debt that is due in more than one year minus the amount that is due within one year

Bad debt vs charity care

bad debt = expectation of payment charity care = no expectation of payment

Shareholder's equity

current AICPA approved term for the difference between assets and liabilities in for-proft HCOs; comprises common stock and retained earnings

Plant and equipment, net

economic resources such as land, buildings, and equipment, minus the amount that has been depreciated over the life of the buildings and equipment (which is called accumulated depreciation)

Horizontal Analysis

evaluation of trends in organization's finances by focusing on percentage changes over time

Temporarily restricted net assets

include donor restricted net assets that the organization can use for the donor's specific purpose once the organization has met the donors requirement

Permanently restricted net assets

include donor restricted net assets with restrictions that never expire such as endowment funds

Retained earnings

income earned by the organization from operations minus dividends (which are distributions of earnings paid to stockholders based on the numbers of shares of stock owned)

nonoperating or other income

money earned from non-patient care services such as investment income

operating income

money earned from providing patient care services and include the total revenue , gains, and other support minus the total expenses

Patient services revenue

money generated by providing patient care minus the amount the organization will not collect as a result of discounting charges per contractual agreement and providing charity care

Premium revenue

money generated from capitation arrangements that must be reported separately from patient services revenue because premium revenue is earned by agreeing to provide care, regardless of whether care is ever delivered

Other operating revenue

money generated from services other than health services to patients and enrollees revenue from rental equipment/office space, sale of supplies, pharmaceuticals, gift shop sales etc. operating vs nonoperating revenue = if revenue was generated in support of the organizations mission for a non-profit hospital income derived from operations is not taxed but income from unrelated businesses such as the gift shop may be taxed as unrelated business income

Common stock

money invested in the organization by its owners

Net assets released from restrictions used for operations

money previously restricted by donors that has become available for operations

Operating expenses

money spent on operations to generate revenue in support of the organizations mission statement can be listed by functional classification (organization division), such as departments which is for internal purposes or natural classification (object-of-expenditure) such as wages or supplies

excess of revenues over expenses (or net income in for-profit organizations )

operating income plus the other income minus total expenses For nonprofit organizations, AICPA requires excess of revenues over expenses to be reported as the performance indicator that reflects the results of operations

Net patient services revenue

patient services revenue minus provisions for bad debt if the healthcare organization recognizes significant amounts of patient services revenue at the time of service without assessing the patients ability to pay

Net assets

the current American Institute of Certified Public Accountants (AICPA) approved term for the difference between assets and liabilities in not-for-profit healthcare organizations

Depreciation and amortization

the expensing of long term assets over time to show their declining value

Gross patient services revenues

total amount of charges for patients utilizing the hospital, regardless of the amount actually paid deductions from gross patient services revenues include amount deducted from total charges to account for contractual allowances and charity care Not required by GAAP