Comparing Balance Sheets Assignment

Comparing Balance Sheets Assignment
Title: Comparing Balance Sheets Assignment

Reporting (1 of 2)

The four major reports are:
Balance sheet
Statement of revenue and expense
Statement of changes in fund balance/net worth
Cash flow statements
Each has its own contribution to the whole.
Reporting (2 of 2)

The basis of reporting is either cash or accrual.
Cash Basis Accounting: Transaction does not enter the books until cash is either received or paid out.
Accrual Basis Accounting: Revenue is recorded when it is earned (not when payment is received) and expenses are recorded when they are incurred (not when they are paid).
Most healthcare organizations are on the accrual basis. The reports in this chapter have been prepared using the accrual method.
Balance Sheet (1 of 2)

The balance sheet records what an organization owes and, basically, what it is worth.
The balance sheet is stated at that particular time. Like a snapshot, it freezes the figures and reports them on a certain date.
Balance Sheet (2 of 2)

The balancing of the elements in the balance sheet represent:
Assets = Liabilities + Net worth / Fund balance
(See Exhibit 11-1.)

Reporting

Statement of revenue and expenses
This statement records the inflow (revenue) along with the outflow (expense) and the net result (income or loss).
This statement covers a period of time (a month; a quarter; a year). If the balance sheet is like a snapshot, then the statement of revenue and expense is like a diary, because it is a record of transactions over a period of time.
Statement of Revenue and Expense

The reporting of the elements in the statement of revenue and expense represents:
operating revenue – operating expenses = operating income
(See Exhibit 11-2.)

Balance Sheet and Statement of Income Components: Practice 11-1

Look at Practice Exercise 11-1 and identify the following items on the Doctors’ Balance Sheet and Statement of Net Income.
Current Liabilities Total Assets Income from Operations Accumulated Depreciation Total Operating Revenue Current Portion of Long-Term Debt Interest Income Inventories 30,000 1,000,000 80,000 480,000 180,000 10,000 -0- 5,000
Reporting

Statement of changes in fund balance/net worth
This statement records changes in equity over the reporting time.
Think of the balance sheet, the statement of revenue and expense and the statement of changes in fund balance/net worth as locked together—the statement of changes in fund balance is the mechanism that links the other two statements.
Balance Sheet and Statement of Revenue Components:
Assignment 11-1

Look in the Supplemental Materials section and identify the following items on the Metropolis Balance Sheet and Statement of Net Revenue.
Current Liabilities Total Assets Income from Operations Accumulated Depreciation Total Operating Revenue Current Portion of Long-Term Debt Interest Income Inventories Current Year Prior year
$ 5,825,000 32,800,000 1,700,000 26,100,000 35,100,000 525,000 80,000 900,000 $ 6,300,000 32,000,000 840,000 24,200,000 34,600,000 500,000 40,000 850,000
Statement of Changes in Fund Balance/Net Worth

The reporting of the elements in the statement of changes in the fund balance/net worth represents (in a simplified format):
Beginning balance + operating income = ending balance
or

Beginning balance – operating income = ending balance.
(See Exhibit 11-3.)

Cash Flow Statement (1 of 3)

This statement, in effect, takes the accrual basis statements and converts them to a cash flow for the period through a series of reconciling adjustments that account for non-cash amounts.
Cash Flow Statement (2 of 3)

In accrual accounting, if cash is not paid or received when revenues and expenses are entered on the books, what happens?
The other side of the entry is Accounts Receivable (for revenue) and Accounts Payable (for expense).
These accounts rest on the balance sheet and have not yet been turned into cash.
Cash Flow Statement (3 of 3)

Another accrual characteristic is recognition of depreciation.
Depreciation is recognized within each year as an expense, but it does not represent a cash expense (see text of the chapter).
All these non-cash amounts are reconciled within the cash flow statement.
Reporting

The reporting of elements in the cash flow statement represents the following (in a simplified format):
Accrual basis beginning balance +/– reconciling non-cash entries = cash basis ending balance
Cash flow adjustments are much clearer when looking at an example. (See Exhibit 11-4.)
Subsidiary Statements

Provide more detail (than the major statements)
They support (and are subsidiary to) the major statements
(See the Metropolis case study for good examples of subsidiary statements.)

Balance Sheet and Statement of Income Components: Practice 11-2

Refer to Doctors Smith and Brown’s Balance Sheet, where Patient Accounts Receivable is stated at $40,000. Do you think this figure is net of an Allowance for Bad Debts?
Solution: No, because we cannot find an equivalent bad debt expense on their statement of net income. Do you think the doctors should have an allowance for bad debts on their statement? Why do you think they do not?
Balance Sheet and Statement of Income Components:
Assignment 11-2 (1 of 2)

Refer to Chapter 33’s Metropolis Health System Balance Sheet and Statement of Revenue and Expense
(a) Patient Accounts Receivable is shown as net of $1,300,000 Allowance for Bad Debts. What percent of gross accounts receivable is the Allowance for Bad Debts?

Solution: The Allowance for Bad Debts is 14.94% (or 15% rounded).
Balance Sheet and Statement of Income Components:
Assignment 11-2 (2 of 2)

Refer to Chapter 33’s Metropolis Health System Balance Sheet and Statement of Revenue and Expense
(b) If the Allowance for Bad Debts is raised to $1,500,000 (from $1,300,000), where does the extra $200,000 go?

Solution: The extra $200,000 goes to the Provision for Doubtful Accounts in the Statement of Revenue and Expense. (The $1,500,000 would become $1,700,000.)
Balance Sheet and Statement of Income Components: Practice 11-3

Refer to Doctors Smith and Brown’s Balance Sheet, where Buildings and Equipment are both stated at net, but land is not.
Do you recall why this is so?
Solution: As mentioned in the chapter text, land is not stated at “net” because land is never depreciated.
Balance Sheet and Statement of Income Components: Assignment 11-3

Refer to Chapter 33’s Metropolis Health System Balance Sheet and Statement of Revenue and Expense
Property, Plant and Equipment of $19,300,000 is shown as “net,” meaning net of the Reserve for Depreciation. If the $19,300,000 is reduced by $200,000, what happens on the Income Statement?
Solution: Bad Debt Expense would rise by $200,000, because the Reserve for Depreciation has risen by that amount.

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Comparing Balance Sheets Assignment Comparing Balance Sheets Assignment

 
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