Ch. 3 The Income Statement and Statement of Changes in Equity

Question 1

4 Financial Statements

Income Statement summarizes?

Answer 1

Income Statement

• Summarizes operations activities with a focus on revenues, expenses, and profitability
• Results over a specified period of time

Revenues

• Cash and unpaid obligations of payers
• Also from investments (securities)

Question 2

1. Revenues can Include?
2. Expenses: What are the two catagories? Explain.
3. What is profitability

Answer 2

Revenues

• Cash and unpaid obligations of payers
• Also from investments (securities)

Expenses

Operating:

• Salaries, supplies, insurance
• Costs directly related to provide service

Capital

• Costs associated with buildings and equipment: Depreciation, lease, interest

Profitability

Question 4

Patient Services

• Parking fees
• Nonpatient food services
• Office and concession rentals
• Sales of pharmaceuticals to employees, staff and visitors

Question 5

Expenses

• Natural Classification: Classifies expenses by the nature of the expenses
• Functional Classification: Classifies expenses by purpose (i.e. inpatient services, outpatient services, administrative)
• Supplies: For income statement purposes, report what is used. (the on hand maybe reported on the balance sheet as inventory)

Question 6

Expenses (Con’t)

Depreciation: Cost matching principle: Costs of fixed assets be mathced to the accounting periods during which the asset produces revenues.

• Straight-line method: divide the historical cost of the asset (less salvage value) by the number of years of its estimated useful life.

Bad Debt %: Bad debt / total revenue

Question 7

Operating Income: (Profitability)

• Earnings related to core activities: i.e. Patient services

Two different profitability measures can be reported:

1. Operating Income: (Total revenue - Total expenses)
   * Nonoperating Income: Earnings unrelated to core activities: i.e. contributions, investments. (only funds that are available for immidiate use)

Expenses related to nonoperating income are not reported separately.

Question 8

Net Income (Bottom line)

Operating Income + Total Nonoperating income

Positive net income with a negative operatiing income is not a good sign. Indicates business is shaky.

Positive net income may be distributed to owners in the form of bonuses.

• The Distribution becomes as expense item that reduses net income

Question 9

Cash Flow

On the Income Statement:

Reported revenue is not the same as cash revenu

Reported expenses may not represent actual cash outflow

**Depreciation and other non-cash expenses must be added back to Net Income to get cash flow.

Question 10

Income Statement of Investor owned businesses

Depreciation Shield: Tax rate(depreciation expense).

Depreciation expense reduces taxes but does not impact cash flow directly, increases cash flow by the amount of the tax reduction.

Question 11

Statement of Changes in Equity

• How much of an organization’s net income will be retained in the business
• If dividend is paid: Net income - Dividends

Question 12

Financial Ratios for analysis

Expense Control:

Total profit margine (Profit margine):

Net Income / Total revenue

(Each dollar of revenue and income genertated produces 4.5 cents of profit i.e. net income)

Also, each dollar of revenue and income required 95.5 cents of expenses.

• The higher the margine the lower the expense
• A slip in margine signals increase in expenses faster than increase in revenues

Question 13

**Operating Margine **

Operating Income / Total Revenue

• 2.2%
• Each dollar of operating revenue genertated by the clinic produced 2.2 cents of profit (operating income)