The below article by Kassouf & Co. Managing Director, Gerard J. Kassouf, CPA, was recently featured in the Summer 2017 Pulse publication by Jefferson County Medical Society. The article defines and explains the most common sections of a financial statement, providing knowledge and insight from a professional Certified Public Accountant.
Article from Jefferson County Medical Society:
Privately owned health care companies usually have monthly financial statements prepared by in-house bookkeepers or external accountants. Financial statements are prepared in two parts.
The Statement of Assets, Liabilities and Owners’ Equity provides the reader with a snapshot of what is owned and what is owed by the practice on the cash basis of accounting. It is important to understand that there are usually no patient accounts receivable or accounts payable to vendors included on the cash basis financial statement.
The Statement of Revenues and Expenses provides the reader with the cash income collected and cash payments made for expenses during a period for the current tax year of the practice. Some non-cash items, such as depreciation and amortization, will usually be shown on these financial statements, which will indicate the profitability of the practice for the period presented.
Let’s take the statements and review them as you might review a monthly financial report. The Statement of Assets, Liabilities and Owners’ Equity is a classified statement—Current Assets, Property and Other Assets are the most common Asset sections. Current Liabilities and Long-term Liabilities are the most common Liability sections. The Owners’ Equity sections will depend on the type of entity you created for tax purposes.
Current Assets consist of your cash accounts, any petty cash and other transactions, such as a short term employee loan. By definition, Current Assets are cash or assets that will convert to cash within a twelve month period.
Property consists of the equipment and leasehold improvements, or building you purchased that is used in the practice. These assets usually depreciate over a time period established by the Internal Revenue Service. Some assets are written off in as short as three years, and some require at least 39 years to write off. (There are many variations of depreciation for tax purposes, which is outside the scope of this topic)
Other Assets consists of payments made that are expected to be written off over long periods of time, such as organization costs or goodwill, or assets that are not expected to convert back to cash within a twelve month period, such as a lease deposit.
Current Liabilities are amounts that you owe which are due soon, but no later than twelve months. Long-term Liabilities are those amounts that must be paid, but are not due for at least twelve months. A bank note that has a term of 5 years is an example of a liability that will be shown on your financial statement in two parts—a portion in the current liability section and a portion in the long-term liability section.
Owners’ Equity, again by definition, is the difference in the amount of the assets and the liabilities. All businesses strive to have more Assets than Liabilities.
The Statement of Revenues and Expenses (The Income Statement) can be developed to provide the user with a significant amount of information on how the health care entity is doing, and if you desire, can provide a comparison with prior years, prior months, etc. This statement presents the revenues collected and expenses paid, and the amount of profit for the period. Therefore, it is important to understand whether any bills remain unpaid at the end of the reporting period, since under the cash basis of accounting, they are not required to be reflected in the statement until they are paid.
The Statement of Revenue and Expenses is your view of the practice. It tells how collections compare to previous periods and how well you are controlling the expenses. Take a look at the major expenses of your practice—Rent, Salaries, Supplies, Benefits and Insurance—these usually account for over eighty percent of the total expenses. They are the difference between profitability and loss.
Remember, however, that it is important to have the proper expenses to generate income to make the practice profitable. In short, it takes money to make money.
Preparing financial information on a monthly basis, and having it soon after the month closes allows you to make tactical adjustments to the practice to improve profitability. That’s why it’s important to obtain, review and analyze each month’s statement as soon as possible after the end of the month.
Gerard J. Kassouf, CPA, Managing Director, Director of Healthcare Services Group