Financial ReportingScott FurnissSr. VP/CFOSt. Agnes HealthCare, Inc.
March 30, 2012
Intro
Todays DiscussionFinance Departments and ActivitiesAccounting Concepts Common Issues Basic Accounting TransactionsBasic Financial StatementsExample Financial StatementsFinancial Ratios and AnalysisCase Study
Finance Departments
Typical Finance DepartmentGeneral AccountingAccounts PayablePayrollTreasuryRates & ReimbursementTaxesFinancial Analysis and BudgetFinancial ReportingAll entities. Hospital and Subsidiaries*
Typical Finance DepartmentDaily Account postingBi-weekly PayrollMonthly Close (J/Es, Reconciliations, etc.)Monthly Compliance Reports (HSCRC)Monthly/Quarterly Management-Board ReportsQuarterly Disclosure ReportsPlus*
Typical Finance DepartmentAnnual BudgetAnnual Cost Reports (CMS, HSCRC, others)Annual Tax Returns (IRS, PBGC, State)Annual Financial Statements and AuditAll entities. Hospital and Subsidiaries*
Accounting Concepts
Reporting StandardsGenerally Accepted Accounting Standards (GAAP)Financial Accounting Standards Board (FASB)Securities Exchange Commission (SEC)Internal Revenue System (IRS)Centers for Medicare & Medicaid Services (CMS)Health Services Cost Review Commission (HSCRC)Employee Retirement Income Security Act (ERISA)Others.
Cash vs. Accrual AccountingAccrual basisrecognized when event happensearnedincurred
Cash basisrecognized when cash changes handsreceivedpaidTwo ways of recording transactions
Accrual Accounting Transactions1/10$1,000 of supplies ordered1/15$600 of supplies arrive, no payment1/31Books closed for January2/10$400 of supplies arrive, no payment2/28Books closed for February3/15Invoice for $1,000 received and paid3/31 Books closed for March
Accrual TransactionsProper matching of revenue and expense transactions and accounting periods
Sheet1
JanuaryFebruaryMarch
Amount Actually Received$600$4000.0
Accrual Accounting Entries:
Accounts Payable (Invoice Recorded)0.00.01,000
Accrual Accounting Entry6001,0000.0
Reversal of Accrual Accounting Entry0.0(600)(1,000)
Total Expense ( A + B - C )$600$4000.0
Without Accrual Accounting Approach0.00.0$1,000
Sheet2
Sheet3
Valuation MethodsCurrent Value: Cash, Vacation liabilities, inventories
Market Value: Investments, Debt
Historical Cost: Buildings and Equipment
Net Realizable Value: Receivables, Payables
Accounts Receivable Net Realizable ValueContractual Adjustments per contracts/agreements
Charity Care inability to pay known when served
Bad Debt Expense failure to pay after service
Allowance for Uncollectible Accounts impact of Contractual Adjustments and Bad Debt
Net Realizable ValueOriginal charges vs. estimate of final collections$12,000,000$2,500,000
A/R Valuation Analysis
A
ACCOUNTS RECEIVABLE AGING ANALYSIS
Accounts Reveivable BalancesTotal0 - 3030 - 6060 - 9090 - 120120 - 150150 - 180> 180
Medicare and Medicaid$11,000,000$4,000,000$2,500,000$1,500,000$1,250,000$1,000,000$500,000$250,000
Commercial & HMO2,400,0001,000,000500,000325,000125,000100,000200,000150,000
Self Pay1,450,000300,000250,000200,000175,000125,000100,000300,000
Total$14,850,000$5,300,000$3,250,000$2,025,000$1,550,000$1,225,000$800,000$700,000
Probability of Collection95.00%90.00%85.00%80.00%75.00%60.00%50.00%
Accounts Receivable Value$12,670,000$5,035,000$2,925,000$1,721,250$1,240,000$918,750$480,000$350,000
Accounts Receivable - Gross$14,850,000
Allowance for Doubtful Accounts(2,000,000)
Accounts Receivable - Net$12,850,000
Accounts Receivable Value12,670,000
Recommended Adjustment$180,000
Common Issues
Depreciation & AmortizationSystematic and rational allocation of the cost of a long-term asset over its estimated useful lifeUsed for both tangible and intangible assetsAllocation of Tangible Assets = DepreciationAllocation of Intangible Assets = AmortizationExamples:MRI - 10 yearsBuilding - 40 yearsSoftware - 5 years
Depreciation MethodsStraight line method - primaryAccelerated methods:Units-of-productionSum-of-the-years-digitsDouble-declining balance Tax implications for taxable entities
Straight Line Depreciation
Valuation of Property Assets(Straight Line Method)
Lease AccountingOperating vs. Capital
Operating: Are we just leasing it for a short period of time?
Capital: Will we own it or use it up by the end of the lease?
Default = Operating unless it meets specific criteria
Why care? . Operating = Lease expense
Capital = Depreciation and interest expense
*
Capital Leases4 Ways to become a Capital Lease:Title passes to Lessee at end of lease term
Bargain purchase option ($1 buy-out)
Lease term is > 75% of estimated useful life (AHA guidebook)
NPV of lease payments >90% of property leased
*
Donor Restricted FundsUnrestricted can be used for any purpose to support entity
Temporarily Restricted restricted by donor for specific purpose
Permanently Restricted only income on investments can be used for purpose determined by the donor
Uniform Prudent Management of Institutional Funds Act (UPMIFA) rules can limit annual spending*
Allocation of CostsBenefitsDepreciationOverheadSupport ServicesOther
Purpose = reflect total cost of business at Department level*
Capitalized ExpensesCosts to make items operationalShippingInstallationCalibration & TestingSystem build (but not data conversion)
Training costs are not capitalized
*
Basic Accounting Transactions
Transaction Data PyramidDaily Transactions & Journal EntriesGeneral LedgerTrial BalanceDepartmental ReportsFinancialStatements
Basic Accounting TransactionsTransaction based activity:Accounts Payable invoices/paymentsPurchasing Activity supplies and servicesPatient ChargesPayrollCollections on receivablesInvestment and Debt activity
Basic Accounting TransactionsJournal Entry Activity:Depreciation expenseBad Debt ExpenseAccrual adjustmentsReconciliation adjustments
This can be a manual activity, data upload, or an interface
Example Activity Entries
Sheet1
Accounts Receivables BalanceTotal0-3030-6060-90>90
Self-Pay Receivable$3,520,000$900,000$900,000$600,000$1,120,000
Medicare Co-Pay Receivable4,640,0001,200,0001,200,000900,0001,340,000
Total8,160,0002,100,0002,100,0001,500,0002,460,000
Probability of Collection98.00%95.00%90.00%50.00%
Accounts Receivables Value$6,633,000$2,058,000$1,995,000$1,350,000$1,230,000
Accounts Receivable - Gross8,160,000
Allowance for Doubtful Accounts(800,000)
Accounts Receivable - Net7,360,000
Accounts Receivable Value$6,633,000
Recommended Adjustment727,000
Sheet2
19X119X219X319X4
Amounts committed to Lease #1$500$500$500$500
Amounts committed to Lease #2500500500
Amounts committed to Lease #3500500
Amounts committed to Lease #4500
Total$500$1,000$1,500$2,000
Total Annual Capital Budget2000200020002000
Remaining Avail. Capital Budget150010005000
Outstanding Lease Balances2500450060007500
Maximum Avail. Debt Capacity5000500050005000
Remaining Avail. Debt Capacity2500500-1000-2500
Sheet5
JE
Sheet4
FUND BALANCE
DebitsRef.Credits
Bal. 4/30/XX$6,875,000.00
Sheet3
ACCOUNT/DESCRIPTIONDEBITCREDIT
Supplies and Services$25,000
Cash$25,000
To record purchase of office supplies
Accounts Receivable$5,000,000
Inpatient Revenue$5,000,000
To record inpatient charges
Accounts Receivable$3,500,000
Outpatient Revenue$3,500,000
To record outpatient charges
Trial BalanceList of all account BALANCES
Total debits = total credits
Preliminary to preparation of financial statements
Basic Accounting TransactionsDouble-entry bookkeepingDebits & CreditsCash TransactionsJournal EntriesSubsidiary recordsAccounts ReceivableAccounts PayablePayrollPurchase Orders*
Example Trial Balance
April 30
Account NameNumberDebitsCredits
Cash100$1,750,000.00
Accounts Receivable105$3,325,000.00
Allowance for Uncollectables106$200,000.00
Inventory110$500,000.00
Plant and Equipment200$10,000,000.00
Accumulated Depreciation250$3,750,000.00
Accounts Payable300$1,750,000.00
Long Term Debt400$3,000,000.00
Fund Balance500$6,875,000.00
Inpatient Revenue600$7,500,000.00
Outpatient Revenue650$1,875,000.00
Discounts670$1,400,250.00
Salaries and Benefits700$5,000,000.00
Supplies and Services720$2,774,750.00
Interest750$100,000.00
Depreciation780$100,000.00
Totals$24,950,000.00$24,950,000.00
Account NameNumberDebitsCredits
Cash100$1,750,000
Accounts Receivable105$3,325,000
Allowance for Uncollectables106$200,000
Inventory110$500,000
Plant and Equipment200$10,000,000
Accumulated Depreciation250$3,750,000
Accounts Payable300$1,750,000
Long Term Debt400$3,000,000
Fund Balance500$6,875,000
Inpatient Revenue600$7,500,000
Outpatient Revenue650$1,875,000
Contractual Allowances670$1,400,250
Salaries and Benefits700$5,000,000
Supplies and Services720$2,774,750
Interest750$100,000
Depreciation780$100,000
Totals$24,950,000$24,950,000
May 31
Account NameNumberDebitsCredits
Cash100$1,845,000.00
Accounts Receivable105$3,825,000.00
Allowance for Uncollectables106$200,000.00
Inventory110$500,000.00
Plant and Equipment200$10,000,000.00
Accumulated Depreciation250$3,760,000.00
Accounts Payable300$1,800,000.00
Long Term Debt400$3,000,000.00
Fund Balance500$6,875,000.00
Inpatient Revenue600$7,850,000.00
Outpatient Revenue650$2,125,000.00
Discounts670$1,400,250.00
Salaries and Benefits700$5,050,000.00
Supplies and Services720$2,779,750.00
Interest750$100,000.00
Depreciation780$110,000.00
Totals$25,610,000.00$25,610,000.00
Account NameNumberDebitsCredits
Cash100$1,845,000.00
Accounts Receivable105$3,825,000.00
Allowance for Uncollectables106$200,000.00
Inventory110$500,000.00
Plant and Equipment200$10,000,000.00
Accumulated Depreciation250$3,760,000.00
Accounts Payable300$1,800,000.00
Long Term Debt400$3,000,000.00
Fund Balance500$6,875,000.00
Inpatient Revenue600$7,850,000.00
Outpatient Revenue650$2,125,000.00
Discounts670$1,400,250.00
Salaries and Benefits700$5,050,000.00
Supplies and Services720$2,779,750.00
Interest750$100,000.00
Depreciation780$110,000.00
Totals$25,610,000.00$25,610,000.00
Sheet3
DebitsRef.Credits
$500,000.00Bal. 4/30/XX
$500,000.00Bal. 5/31/XX
Departmental Reports
Basic Financial Statements
Basic Financial StatementsBalance SheetStatement of Operations (Income Statement)Statement of Changes in Net AssetsStatement of Cash FlowsNotes to the Financial Statements
Basic Financial StatementsBalance Sheet Shows assets, liabilities and equity (Assets = Liabilities + Equity)Statement of position - a snapshot in timeAlways as of a date, not for a period of time
Balance SheetAssets - items of value to which a company has a legal claim
Liabilities - amounts owed by company
Equities - ownerships net claim on the assets
Balance Sheet
Current Assets
Long-Term Assets
Current Liabilities
Long-Term Debt
Equity
Current AssetsWill be consumed within 12 monthsListed in order of liquidity:CashShort-term investmentsAccounts receivableInventoriesPrepaid expenses
Current AssetsCash checks and money on depositcredit card receipts Short-term investments marketable securitiescertificates of depositother investment instruments
Current AssetsAccounts receivablefunds owed to the companygovernment and insurance payorsindividual patientsotherInventoriesMedical, surgical and office suppliesFuel, food
Current AssetsPrepaid expenses prepaid insuranceprepaid rent and suppliesprepaid interest and property taxes
Fixed (Long-Term) AssetsUseful life > 1 year Long-term assets include:Property, plant and equipmentNatural resources Intangible assets
Property, Plant & EquipmentLand improvementsparking lots, sidewalks, landscapingBuildingsFixed equipment Boilers, HVAC Major equipment MRI, Linear Accelerators
Intangible AssetsItems of value which lack physical characteristicsGoodwillPatents/TrademarksFranchises/LicensesCustomer listsComputer software
Current LiabilitiesPayable within 12 monthstrade accounts payable (invoiced)salaries, wages, payroll taxes payable, accrued vacation accrued liabilities (known, but not yet invoiced)advances from third-party payersinterest payable
Long-Term LiabilitiesRepaid over a period > 1 yearbonds and notes payablebank loanspension liability
EquityNet assets of the companyOwners claims on the company assetsstockcontributed (or paid in) capitalaccumulated profits/lossesRestricted and Unrestricted
Unique to Not-For-ProfitsAssets limited as to useContributions receivableAdvances from 3rd party payorsThird party settlementsRestricted net assetsNo Tax expense/liability
Unique to Health CareASSETS:Assets Limited as to UseProceeds from tax-exempt bond issuesConstruction FundDebt Service Reserve FundBoard Designated Donor RestrictedContributions
Unique to Health CareLIABILITIES AND NET ASSETS:Advances from third-party payorsTemporarily and permanently restricted Net Assets
Statement of Operations
Operating Revenues
Operating Expenses
Net Operating Income
Basic Financial StatementsSTATEMENT OF OPERATIONS:Revenues and Gains ExpensesOther Income and Expenses
Unique to Health Care NFPsOTHER REVENUES:Separate from Patient RevenueContributionsNet Assets Released from RestrictionsRental IncomeParking/Cafeteria SalesGrants
Basic Financial StatementsSTATEMENT OF CHANGES IN NET ASSETS:Operating incomeGrantsContributionsNet assets released from restrictionsFor operationsFor property and equipment
Basic Financial StatementsSTATEMENT OF CASH FLOWS:Operating activityInvesting activityFinancing activityUnrestricted and Restricted
Notes to Financial StatementsSignificant Accounting PoliciesMajor Assets and Liabilities DetailCommitments and ContingenciesOther Information
Notes to Financial StatementsSIGNIFICANT ACCOUNTING POLICIES:Organizational structureCharity CareRevenue Methodology Asset Valuations
Notes to Financial StatementsASSET AND LIABILITIES DETAIL:Investments Cost vs.. Current ValueProperty and EquipmentDebt and Assets Held by Trustee
Notes to Financial StatementsCOMMITMENTS AND CONTINGENCIES:Pension and Post-Retirement BenefitsMalpracticeOutstanding LitigationCredit Risk/Payor Mix
Notes to Financial StatementsOTHER INFORMATION:Related Party TransactionsCredit Risk/Payor MixFunctional ExpensesHealthcare servicesGeneral and administrative
Financial Ratios and Analysis
Financial Ratios and Analysis*
Average Age of PlantAccumulated Depreciation/Depreciation ExpenseAverage Daily CensusPatient Days/365Bad Debt Expense/Total Operating RevenueBad Debt Expense/(Net Patient Revenue + Other Operating Revenue)Cash FlowNet Income + Depreciation & Amortization Cashflow/Total Liabilities(Net Income + Depreciation & Amortization)/Total Liabilities Cushion RatioCash/Maximum Annual Debt ServiceDays Cash on HandCash/(Operating Expenses - Depreciation & Amortization)/365)EBIDA (Earnings Before Interest, Depreciation & Amortization)Net Income + Interest, Depreciation & Amortization
Financial Ratios and Analysis*
EBIDA MarginEBIDA/Total RevenueInterest CoverageNet Income Available for Debt Service/ Interest ExpenseLong Term Debt/CapitalizationLong Term Debt/(Unrestricted Net Assets + Long Term Debt)Maximum Annual Debt Service (MADS) CoverageNet Income Available for Debt Service/MADS Operating MarginNet Operating Income/Total Operating RevenueOperating Cash Flow MarginEBIDA/Total Operating RevenuePayment PeriodCurrent Liabilities/(Total Operating Expense - Depreciation & Amortization)
Financial Ratios and Analysis*
Sample Hospital - Key Financial Metrics ReportFiscal Year End20072008200920102011Income Statement and Cash FlowOperating margin (%)1.461.690.411.811.13Excess margin (%)3.793.963.111.062.70EBIDA margin (%)10.7510.839.447.759.18Cash flow/total liabilities (%)16.918.116.211.614.6DebtMax debt service coverage (x)3.935.304.824.065.01Maximum debt service-to-total revenue (%)2.722.041.961.911.83
Financial Ratios and Analysis*
Sample Hospital - Key Financial Metrics ReportFiscal Year End20072008200920102011Balance SheetDays cash on hand163179154128140Unrestricted cash/debt (%)130166160126145Cushion ratio (x)14.921.819.817.219.3Long-term debt/capitalization (%)32.927.627.632.430.5Average age of plant (years)11.411.512.712.511.1
Questions?
*********WELL TALK BALANCE SHEET TODAY. INCOME STATEMENT NEXT WEEK.
MHHEFA RESTICTIONS ON USE OF PROCEEDS.
BOARD RESTRICTIONS FOR SPECIAL USES DEPRECIATION/FUTURE CAPITAL PROJECT/OTHER
CONTRIBUTIONS RECEIVABLE = ONLY GIVEN TO NFPSADVANCES= PAYORS DUTY TO GET DISCOUNT (for Quick Pay)
3RD PARTY SETTLEMENT= MEDICARE/MEDICAID RECEIVABLE/PAYABLE FOR :ANNUAL COST REPORTS.
TEMPORARILY RESTRICTED = Available when request is achieved.
PERMANENTLY RESTRICTED= Only income is available.**