Financial Line Items Identification

Amrita Shenoy

Financial Line Items Identification by Amrita Shenoy is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

Contents

- Front Matter

- Part I. Financial Analysis and Management Reporting

- The Balance Sheet

- The Income Statement or Statement of Operations

- The Statement of Owners' Equity/Changes in Net Assets

- The Statement of Cash Flows

- Quiz #1

- Quiz #2

1

Front Matter

The content in this text was created to deepen student’s understanding of financial line items. This text was co-developed and co-created by the author Dr. Amrita Shenoy and the RLB Library at the University of Baltimore, and is designed to be used in conjunction with the textbook, Introduction to the financial management of healthcare organizations (7th ed.). Health Administration Press by Michael Norwicki. If you are using this supplement and book in a course, you can find the book at your library and request that it be placed on course reserve for your students.

I

Financial Analysis and Management Reporting

Steps in Financial Analysis

- Financial Analysis includes the following three steps:

1. Establish the facts about the organization

2. Compare the facts of the organization over time with facts of similar organizations

3. Use perspective and judgment to make decisions regarding the comparisons

- Financial decisions by management can occur at any level—departmental, divisional, or institutional—within the organization

- Comparison of one organization with another includes ratio analysis, horizontal analysis and vertical analysis

- Ratio analysis evaluates the organization’s performance by computing the relationships of important line items in the financial statements

- Horizontal analysis evaluates the trend in the line items by focusing on the percentage change over time

- Vertical analysis evaluates the internal structure of the organization by focusing on a base number and then showing percentages of important line items in relation to the base number

- There are four types of financial statements:

1. The Balance Sheet

2. The Income Statement

3. The Statement of Owner’s Equity

4. The Statement of Cash Flows

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The Balance Sheet

The balance sheet shows the organization’s financial position at a specific point in time, typically at the end of the accounting period. It presents the organization’s assets, liabilities, and net assets (in a not-for-profit organization) or owner’s/stockholder’s equity (in a for-profit organization).[1]

The Accounting Equation is as follows:

- Assets = Liabilities + Net Assets (in a not-for-profit organization)

- Assets = Liabilities + Owner’s Equity (in a for-profit organization)

Term

Definition

Section Info

Accounts Payable

Value of goods or services purchased that will be paid for at a later date

Included in current liabilities

Accrued Expense

Expense incurred in a period but not yet recorded, and no money has been paid

Included in current liabilities

Bad Debt

Uncollectible amounts from customer accounts

Included in current assets

Charity Care

Consists of money due to the organization by patients and third parties

Included in current assets

Common Stock

Corporation's primary class of stock issued, with each share representing a partial claim to ownership or a share of the company's business

Included in shareholder's equity

Current Asset

Asset that will be used or consumed in one year or less

Includes cash, temporary investments, net accounts receivables, net of contractual allowances, charity care, bad debt, inventory, and prepaid expenses

Current Liability

Debt or obligation due within one year

Includes accounts payable, noted payable, accrued expenses payable, deferred revenue, estimated third-party adjustments, and current portion of long-term debt

Current Portion of Long-Term Debt

Current amount of the organization's long-term debt

Included in current liabilities

Deferred Revenue

Money received but not yet earned by the organization

Included in current liabilities

Dividend

Portion of the net worth (equity) that is returned to owners of a corporation as a reward for their investment

Included in shareholder's equity

Estimated Third-Party Adjustments

Approximations of how much money the organization will be required to return to third-parties due to over-payments to the organizations

Included in current liabilities

Explanatory Notes

Last section of the Balance Sheet which includes specific notes on transactions that took place at the point of time of reporting

Inventory

Value of products to be sold or items to be converted into sellable products

Included in current assets

Liability

Probable future sacrifice or economic benefits arising from present obligations or past transactions

Two types: current and long term

Long-Term Debt, Net of Current Portion

Debt that is due in more than one year minus the amount that is due in one year

Included in long-term liabilities

Long-Term Investment

Stocks, bonds, or other types of investments held for more than one operating cycle or one year, whichever is longer

Included in non-current assets

Long-Term Liability

Debt settled outside one year or one operating cycle, whichever is longer

Includes long-term debt and net of current portion

Net Accounts Receivable

Consists of money due to the organization by patients and third parties

Included in current assets

Net Assets

Difference between assets and liabilities in a not-for-profit organization which represents the owner's interest and other financial interests

Net of Contractual Allowances

Consists of money due to the organization by patients and third parties

Included in current assets

Net Plant, Property, and Equipment

Land, buildings, and equipment minus the depreciation accumulated over time

Included in non-current assets

Noncurrent Asset

Asset that will be used or consumed over more than a year

Includes net plant, property, equipment, long-term investments, and other assets

Notes Payable

Value of amounts borrowed that will be paid in the future with interest

Included in current liabilities

Other Noncurrent Asset

Assets limited to use by contracts with outside parties and goodwill

Included in non-current assets

Permanently Restricted Net Assets

Includes donor-restricted net assets with restrictions that never expire, such as endowment funds

Prepaid Expenses

Expenditures for goods and services not yet used or consumed, such as rent and insurance premiums

Included in current assets

Retained Earnings

Cumulative, undistributed net income or net loss for the business since its inception

Included in shareholder's equity

Stockholders' Equity

Owner or stockholders' investments in the business and earnings

Also called shareholder's equity, owner's equity, or retained earnings

Temporarily Restricted Net Assets

Includes donor-restricted net assets that the organization can use for the donor's specific purpose after meeting the donor's restriction, such as the passage of time or an action by the organization

Temporary Investment

Investments that are expected to be sold within a year

Included in current assets

Unrestricted Net Assets

Includes net assets that have not been restricted by donors or granters, such as the excess of revenues to expenses from operations

Continue Reading

1. Nowicki, M. (2017). Introduction to the financial management of healthcare organizations (7th ed.). Health Administration Press. ↵

The Income Statement or Statement of Operations

The Statement of Operations in a not-for-profit organization is also called the Income Statement in for-profit organizations. It summarizes the organization’s revenue, expenses, and the excess of revenues over expenses (also called income before taxes in a for-profit organization).[1]

The relationship of the statement of operations to the balance sheet can be best explained by the following equation:

- Assets = Liabilities + Net Assets + (Net Expenses – Expenses)

- Where permanent accounts of the balance sheet—that carry forward balances to the next year—relate to the temporary accounts of the statement of operations—which are the accounts that zero out at the end of each year

Term

Definition

Section Info

Bad Debt Expense

The exact uncollectible amount from customer accounts

Included in revenues

Charity Care

Reflects services the organization provided with no expectation of payment

Included in revenues

Amortization

Allocation of the costs of intangible assets over their useful economic lives

Included in expenses

Depreciation

Process of allocating the costs of a tangible asset over the asset's economic life

Included in expenses

Expense

Cost associated with providing goods or services

Gross Patient Services Revenue

Total amount of charges for patients utilizing the organization, regardless of the amount actually paid

Included in revenues

Interest

Expense incurred with borrowed money

Included in expenses

Net Income

When revenues and gains are greater than expenses and losses

Net 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

Included in revenues

Non-Operating Income

Money earned from non-patient care services, such as investment income

Operating Expenses

Daily operational costs not associated with the direct selling of products or services

Included in expenses

Operating Income

Money earned from providing patient care services and includes total revenue, gains, and other support minus the total operating expenses

Other Operating Expenses

Miscellaneous expenses that have not been reported elsewhere

Included in expenses

Other Operating Revenue

Money generated from services other than services to patients and enrollees which includes money from rental equipment and office space, sales of supplies and pharmaceuticals, cafeteria and gift shop sales, etc.

Included in revenues

Premium Revenue

Money generated from Capitation arrangements that must be reported separately from patient services revenue because it is not dependent on care being delivered

Included in revenues

Revenue

Inflows or other enhancements of assets of an entity from its operations

Continue Reading

1. Nowicki, M. (2017). Introduction to the financial management of healthcare organizations (7th ed.). Health Administration Press. ↵

The Statement of Owners' Equity/Changes in Net Assets

The Statement of Changes in Net Assets (called the Statement of Equity in a for-profit organization) shows the reasons why net assets changed from the beginning of the statement period to the end of the statement period.[1] This statement is important in showing how the changes in the excess of revenues over expenses affect the net asset or equity position of the organization.

Term

Definition

Section Info

Contributions for Charity Care

Represents money donated to the hospital for providing charity care

Included in temporarily restricted net assets

Contributions for Endowment Funds

Includes money received from donors with permanent restrictions on the principal and interest

Included in permanently restricted net assets

Increase (or Decrease) in Temporarily Restricted Net Assets

Presents the total changes in temporarily restricted net assets during the statement period

Included in temporarily restricted net assets

Net Assets Released from Restrictions

Includes money previously restricted by donors that has become available for use

Included in temporarily restricted net assets

Net Realized and Unrealized Gains on Investments

Reflects an increase on the value of investment (unrealized until sold) and an increase in cash (realized through dividends or interest)

Included in temporarily restricted net assets

Net Realized and Unrealized Gains on Investments

Represents and increase in the values of investments and an increase in cash

Included in permanently restricted net assets

Permanently Restricted Net Assets

Presents changes in permanently restricted net assets during the accounting period

Includes contributions for endowment funds and net realized and unrealized gains on investments

Temporarily Restricted Net Assets

Presents the changes in temporarily restricted net assets during the statement period

Includes contributions for charity care, net realized and unrealized gains on investments, net assets released from restrictions, and increase/decrease in temporarily restricted net assets

Total Changes in Net Assets

Difference between total net assets at the beginning of the year and the total net assets at the end of the year

Unrestricted Net Assets

Includes net assets that have not been restricted by donors or granters, such as the excess of revenues to expenses from operations

Continue Reading

1. Nowicki, M. (2017). Introduction to the financial management of healthcare organizations (7th ed.). Health Administration Press. ↵

The Statement of Cash Flows

The Statement of Cash Flows shows the organization’s cash flow, i.e., the amount of cash receipts and where they come from, and the amount of cash disbursements and where they went during the statement period.[1] The statement has classifications from three activities: cash flow from operating activities; cash flow from investing activities; and cash flow from financing activities.

Term

Definition

Cash Flow from Operating Activities

Begins with a change in net assets and then includes changes in cash between statement periods for providing patient care services

Cash Flow from Investing Activities

Includes changes in cash between statement periods for investing in fixed assets, such as property and equipment and for selling fixed assets

Cash Flow from Financing Activities

Includes changes in cash between statement periods for financing activities such as debts, endowments, grants, and transfers

Net Increase/Decrease in Cash and Cash Equivalents

Computed by adding the net cash from operating, investing, and financing activities

Cash and Cash Equivalents

At the beginning of the year, corresponds to the cash/cash equivalents at the end of the previous year

Continue to Quiz #1

1. Nowicki, M. (2017). Introduction to the financial management of healthcare organizations (7th ed.). Health Administration Press. ↵

Quiz #1

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Quiz #2

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