Prescott College Public Health Essay

Chapter 4 Excel TableAssets = Liabilites + Equity
solve for
solve for
solve for
unknown
Equity
Assets
Liabilities
Assets
Liabilities
Equity
154,815
100,747
54,068
154,815
100,747
54,068
154,815
100,747
54,068
Sunnyvale
Assets
Liabilities
Equity
2,011
154,815
100,747
54,068
2,010
115,101
68,893
46,208
Chapter 4 Excel Table
Net Working Capital = Current Assets – Current Liabilities
2,011
2,010
Current Assets
54,306 39,715
Current Liabilities
15,425 15,315
Net Working Capital
38,881 24,400
63%
Chapter 4 Excel Table
Debt Ratio = Total Debt/Total Assets
2011
2010
Total Debt
100747
68893
Total Assets 154815 115101
Debt Ratio
65%
60%
Problem 2 – Chapter 4
Below are financial statement information for four not-for-profit clinics.
Fill in the missing values.
December 31, 2019
Assets
Liabilities
Equity
December 31, 2018
Assets
Liabilities
Equity
Clinic 1 Clinic 2 Clinic 3
850.000 175.000
642.000
325.000
85.000 445.000
Clinic 1
Clinic 2 Clinic 3
125.000 680.000
445.000 62.000
196.000
430.000
Clinic 4
85.000
45.000
Clinic 4
93.000
80.000
Problem 2 – Chapter 4
Consider the following BestCare HMO Balance Sheet
Assets
Current Assets
Cash
Net premium receivable
Supplies
Total Current Assets
Net property and equipment
6737
1250
388
8375
5924
TOTAL ASSETS
14299
Liabilities and Net Assets
Accounts Payable – medical services
Accrued expenses
Notes payable
Total Current Liabilities’
Long-term debt
Total Liabilities
5144
929
382
6455
4295
10750
Net assets – (equity)
4118
TOTAL LIABILITIES AND NET ASSETS
14868
4.5(b) – What is BestCare’s net working capital?
Current Assets
Current Liabilities
#VALUE!
4.5(c ) What is BestCare’s debt ratio?
Total Debt (Liabilities)
Total Assets
#VALUE!
4.5(c ) If the industry average for debt ratios is 55%, what does this tell us about Best Care?
Problem 2 – Chapter 4
Consider the following Green Valley Balance Sheet
Assets
Current Assets
Cash
Investments
Net patient accounts receivable
Supplies
Total Current Assets
Property and equipment
Less accumulated depreciation
Net Property and Equipment
TOTAL ASSETS
Liabilities and Net Assets
Current Liabilities
Accounts payable
Accrued expenses
Notes payable
Total Current Liabilities’
Long-term debt
Shareholder’s Equity
Common stock $10 par value
Retained Earnings
TOTAL LIABILITIES
Total Liabilities
& EQUITY
& Equity
105.737
200.000
215.600
87.655
608.992
2.250.000
-356.000
1.894.000
2.502.992
72.250
192.900
180.000
445.150
1.700.000
100.000
257.842
357.842
2.502.992
4.6b) – What is Green Valley’s net working capital?
Current Assets
Current Liabilities
#VALUE!
4.6(c ) What is Green Valley’s debt ratio?
Total Debt (Liabilities)
Total Assets
#VALUE!
4.6(c ) How does Green Valley’s debt ratio compare with Best Care from Part 2?
4-1
CHAPTER 4
The Balance Sheet and
Statement of Cash Flows
This chapter focuses on the second
two financial statements: the balance
sheet and the statement of cash flows.
In addition, the chapter discusses links
between the income statement and the
balance sheet and explains how
underlying transactions are posted on
the balance sheet.
Copyright © 2012 by the Foundation of the American College of Healthcare Executives
Version
10/26/11
4-2
Balance Sheet Basics
■ Whereas the income statement contains
information about a business’s
operations and profitability, the balance
sheet contains information about:
● The assets of an organization.
● The liabilities and equity of the business, or
how the assets are financed.
■ The balance sheet presents a business’s
position at a given point in time. How
does this differ from the income
statement?
4-3
Balance Sheet Basics (Cont.)
The balance sheet is organized with a
left side (or upper section) and right
side (or lower section):
Assets
Current assets
Long-term assets
Total assets
Liabilities and Equity
Current liabilities
Long-term liabilities
Equity
Total liabilities and equity
4-4
Balance Sheet Basics (Cont.)
■ The basic format of the balance sheet
highlights the accounting identity, often
called the basic accounting equation:
Assets = Liabilities + Equity.
■ Note that the accounting identity is
often expressed as follows:
Equity = Assets – Liabilities,
which highlights the fact that the equity
amount is a residual.
4-5
Balance Sheet Basics (Cont.)
You can think of a balance sheet in
terms of home ownership:
Assets
Home
$300,000
Total assets $300,000
Note that the values on a
business balance sheet
are book (GAAP) values,
not market values.
Liabilities and Equity
Mortgage
$200,000
Equity
100,000
Total liab and eqty $300,000
But these are market
values. What happens if
the value of the house
falls to $250,000?
$150,000?
4-6
Sunnyvale Clinic: Assets
(in thousands)
2011
Current Assets:
Cash and equivalents
$ 12,102 $ 6,486
Short-term investments
10,000
5,000
Net patient accounts receivable 28,509
25,927
Inventories
3,695
2,302
Total current assets
$ 54,306 $ 39,715
Long-term investments
$ 48,059 $ 25,837
Net property and equipment
$ 52,450 $ 49,549
Total assets
$154,815
$115,101
2010
4-7
Current Assets
■ Assets either possess (say, cash) or
create (say, buildings and equipment)
economic benefit to the business.
■ Current assets include:
● Cash
● Other assets that are expected to be
converted into cash within the next year:




Cash equivalents
Short-term investments
Net patient accounts receivable
Inventories
4-8
Current Assets (Cont.)
■ Because current assets are expected to
be quickly converted to cash, they are
important to a firm’s liquidity.
■ A traditional measure of a business’s
liquidity is net working capital (NWC):
NWC = Current assets – Current liabilities
2011 = $54,306 – $15,425 = $38,881,000.
4-9
Current Assets (Cont.)
■ Cash represents actual cash in hand and
commercial checking accounts.
■ Cash equivalents are cash-like investments with
maturities of 3 months or less.
■ Short-term investments (also called marketable
securities) are investments in highly liquid,
typically low-risk, securities having a maturity of
less than one year:
● One example is Treasury bills (T-bills).
● These securities are reported at cost, but their current
market values are given in the footnotes.
● Why do businesses hold short-term investments?
4 – 10
Current Assets (Cont.)
■ Net patient accounts receivable lists
revenues owed to the business but not
yet collected.
■ Of the $166,900,000 in net patient
service and premium revenue in 2011
(net of the provision for bad debts),
$28,509,000 (the receivables) are yet to
be collected.
● Where is the $166,900,000 – $28,509,000
= $138,391,000 that has been collected?
4 – 11
Current Assets (Cont.)
■ Inventories represent the dollar amount
of expendable supplies on hand.
● For providers, inventories are primarily
medical supplies.
● Only supplies actually consumed in
treating patients are expensed on the
income statement.
■ Providers with small inventory balances
often report them in a catchall account
titled Other current assets.
4 – 12
Current Assets (Cont.)
■ Note that current assets are listed in
order of liquidity, or nearness to cash:
● Cash (plus equivalents)
● Short-term investments
● Net patient accounts receivable
● Inventories
■ Current assets are necessary to
support operations, but they provide
no (or little) explicit monetary return.
4 – 13
Long-Term Investments
■ Long-term investments are investments in
securities (financial assets) as opposed to
buildings and equipment (real assets) that
have maturities greater than one year.
■ Often, this account is called funded
depreciation, because it is funded
primarily by depreciation cash flow.
■ It is used more by not-for-profit
businesses than by investor-owned
businesses. Why?
4 – 14
Property and Equipment
■ Net property and equipment represents
real assets (as opposed to financial
assets) having useful lives greater than
one year. Often, such assets are called
fixed assets.
■ In general, the assets reported on this line
consist of land, buildings, and equipment.
■ Although only a net amount is reported
on the face of the balance sheet, the
notes contain the gross/net breakdown.
(See next slide.)
4 – 15
Property and Equipment (Cont.)
■ The footnotes to Sunnyvale’s financial statements
contain the following information:
2011
2010
Property and Equipment:
Land
$ 2,954 $ 2,035
Buildings and equipment
85,595
77,208
Gross property and equipment $88,549 $79,243
Less: Accumulated depreciation 36,099
29,694
Net property and equipment
$52,450 $49,549
■ When purchased, fixed assets are posted on the
balance sheet at their original (gross) cost.
■ Each year, the accumulated depreciation account is
increased by the amount of depreciation reported on
the income statement. Thus, net fixed assets is
reduced each year by the annual depreciation expense.
4 – 16
Sunnyvale Clinic: Liabilities and Equity
(in thousands)
2011
Current Liabilities:
Notes payable
$ 4,334 $ 3,345
Accounts payable
5,022
6,933
Accrued expenses
6,069
5,037
Total current liabilities $ 15,425 $ 15,315
Long-term debt
$ 85,322 $ 53,578
Total liabilities
$100,747 $ 68,893
Net assets (Equity)
$ 54,068 $ 46,208
Total liabilities and equity
$154,815
$115,101
2010
4 – 17
Liabilities
■ Liabilities represent claims against
assets that are fixed by contract. In
other words, liabilities are fixed
financial obligations of the business.
Failure to meet these claims can result
in bankruptcy and potential closure.
■ Although some liability obligations are
to suppliers, employees, tax
authorities, and vendors, the largest
obligations are to creditors, who
furnish debt capital to businesses.
4 – 18
Current Liabilities
■ Current liabilities are those
obligations that come due (must be
paid) within one year (accounting
period).
■ The most common current liabilities
are:
● Notes payable
● Accounts payable
● Accrued expenses
4 – 19
Current Liabilities (Cont.)
Notes payable are short-term debt
obligations, typically bank loans.
●Maturities of one year or less
● Often takes the form of a line of
credit
● Usually used to finance temporary
(seasonal or cyclical) increases in
current assets
4 – 20
Current Liabilities (Cont.)
■ Accounts payable stems from buying
goods (typically medical supplies) from
vendors on credit called trade credit.
● Vendors often have payment terms such
as net 30. Here, the provider has 30 days
to pay the invoice.
● The amount purchased, but not yet paid, is
carried as an accounts payable.
4 – 21
Current Liabilities (Cont.)
■ Accrued expenses (accruals) are
payment obligations of the business,
primarily:
● Salaries to employees
● Taxes to government authorities
● Interest payments to debt suppliers
■ For example, wages earned during the
last week of December, but not paid
until the first week of January, would
appear on the December 31 balance
sheet as an accrual.
4 – 22
Long-Term Debt
■ Long-term debt represents debt
financing with maturities greater than
one year.
● Smaller businesses often obtain long-term
credit from commercial banks. Such debt
is called a term loan.
● Larger businesses typically issue (sell)
bonds.
■ Detailed information is provided in the
notes section.
4 – 23
Equity
■ Equity represents the non-liability claims
against a business’s assets. Equity
obligations are not fixed by contract.
● For investor-owned businesses, equity is the
amount of owner-supplied financing.
● For not-for-profit businesses, equity is the
amount of capital supplied “by the
community.”
■ As mentioned earlier, the equity account
is really a residual:
Equity = Total assets – Total liabilities.
4 – 24
Equity (Cont.)
■ The equity section of the balance
sheet, more than anything else,
distinguishes an investor-owned
business from a not-for-profit
business.
■ In not-for-profit corporations, the
equity account is called net assets–it
is the dollar value of assets net of
liabilities.
4 – 25
Equity (Cont.)
A for-profit equity section might look
like this:
2011 2010
Stockholders’ Equity:
Common stock ($1 par value,
1,500,000 shares authorized,
1,000,000 shares outstanding)
Capital in excess of par
Retained earnings
Total equity
$ 1,000
$ 1,000
9,000
44,068
9,000
36,208
$54,068
$46,208
4 – 26
Equity (Cont.)
■ Note that the retained earnings account,
or the entire net equity account for notfor-profit organizations, is influenced by
the amount of net income shown on the
income statement.
■ For a not-for-profit business, the entire
amount of net income flows to the equity
section of the balance sheet.
■ For a for-profit business, some of the net
income may be paid out as dividends.
The remainder flows to the balance sheet.
4 – 27
Equity (Cont.)
■ The right side of the balance sheet
gives the business’s mix of debt and
equity financing, which is called its
capital structure.
■ Capital structure is a key financing
decision because it affects a
business’s:
● Overall risk
● Cost of financing
4 – 28
Fund Accounting
■ Not-for-profit providers with restricted
(endowment) contributions are required to
create more complex balance sheets
according to fund accounting rules.
■ Assets and liabilities are classified as:
● Unrestricted
● Temporarily restricted
● Permanently restricted
■ Such organizations are encouraged to
provide “regular” statements to outsiders.
4 – 29
Statement of Cash Flows
■ The statement of cash flows combines
both income statement and balance
sheet data to create an income
statement-like report that focuses on
cash flows.
■ It is designed to answer three questions:
● Where did the business get its cash?
● What did it do with the cash it got?
● How did its cash position change?
4 – 30
Statement of Cash Flows (Cont.)
■ Like the income statement, it reports
transactions over some time period.
■ The top part of the statement is divided
into three sections:
● Cash flows from operating activities
● Cash flows from investing activities
● Cash flows from financing activities
■ The bottom part reconciles the change in
cash on the statement with the cash
account on the balance sheet.
■ Note that there are two ways of expressing
the cash flows from operating activities.
4 – 31
Sunnyvale Clinic: Statement of CFs (1)
(in thousands)
2011
Cash Flows from Operating Activities:
Operating income
$ 3,747 $ 4,330
Adjustments:
Depreciation
6,405
5,798
Increase in accounts receivable (2,582) (1,423)
Increase in inventories
(1,393)
(673)
Decrease in accounts payable
(1,911)
(966)
Increase in accruals
1,032
865
Net cash from operations
$ 5,298 $ 7,931
2010
4 – 32
Sunnyvale Clinic: Statement of CFs (2)
(in thousands)
2011
Cash Flows from Investing Activities:
Capital expenditures
($ 9,306) ($ 1,953)
Investment income
4,113
3,876
Purchase of short-term securities (5,000)
0
Purchase of long-term securities (22,222) (20,667)
Net cash from investing
($32,415) ($18,744)
2010
4 – 33
Sunnyvale Clinic: Statement of CFs (3)
(in thousands)
2011
Cash Flows from Financing Activities:
Bank loan (notes payable) increase $ 989 $
Long-term debt increase
31,744
0
Net cash from financing
$32,733 $ 0
Net increase (decrease) in cash
Cash and equivalents, beginning
Cash and equivalents, end
0
$ 5,616 ($10,813)
$ 6,486 $17,299
$12,102 $ 6,486
2010
4 – 34
Statement of Cash Flows (Cont.)
■ The top (operations) section of the
statement of cash flows tells us that in
2011 Sunnyvale:
● Had a positive operating income and
depreciation cash flow.
● Increased (invested in) receivables and
inventories.
● Decreased (paid off some) payables.
● Increased its accrual financing.
■ When all flows are considered, the
clinic generated a large positive cash
flow ($5,298,000) from operations.
4 – 35
Statement of Cash Flows (Cont.)
■ The middle (investment) section tells
us that Sunnyvale:
● Invested heavily in new fixed assets.
● Earned investment income.
● Purchased (invested in) new short-term
securities.
● Purchased (invested in) a large amount
of new long-term securities.
■ When all investment flows are
considered, on net the clinic invested
$32,415,000 in securities.
4 – 36
Statement of Cash Flows (Cont.)
■ The bottom (financing) section tells
us that Sunnyvale:
● Used a small amount of short-term debt
financing (bank loan).
● Increased its use of long-term debt from
$0 to a large amount.
■ When all financing flows are
considered, the clinic increased its
use of debt financing by $32,733,000.
4 – 37
Statement of Cash Flows (Cont.)
■ When all sections are considered, in
2011 Sunnyvale had a positive cash
flow (net increase in cash and
equivalents) of $5,616,000.
■ The very bottom of the statement of
cash flows reconciles this increase
with the balance sheet account.
● What is the most important line on the
statement of cash flows?

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