Prescott College Public Health Essay

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Prescott College Public Health Essay

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Chapter 4 Excel Table Assets = 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?