exam 2 financial management

financial management

actions taken to obtain and maximize the use of money

how can financial information be used?

to access the impact of investment options and improve performance through process management

how can we improve financial performance?

through counts management, inventory management, cash management

t/f: good financial information is essential to effective planning

true

Financial Accounting Standards Board (FASB)

sets the standards for accounting and financial reporting

entity

business capable of economic action, ongoing, financial reporting the continuity over time

transactions

must be recorded, can be summarized as long as its accurate

cost valuation

value of transactions must be recorded

what are options for cost valuation?

price at sale, the replacement or purchase price

which option of cost valuation is the most useful valuation?

price paid to purchase

double entry

each transaction has two aspects, the change in the entity's assets and the change in the source of financing

acrrual

recording financial transactions with an appropriatepriod of time

when should revenue and expenses be recorded?

when services are sold or costs are incurred

matching

income of an activity must be matched with expenses of the same activity so that performance can be assessed

is matching consistent with use of accrual basis for accounting?

yes

when is revenue recorded for accrual?

within the period in which it is earned

when should expenses be recorded for accrual?

in the period when resources are consumed for treating patients

when is revenue recorded with cash payment?

when cash is recieved

when should expenses be recorded with cash payment?

when bills are paid

who most commonly uses cash payment?

small private practices and partnerships

what are accounting conventions?

relevance, reliability, neutrality, materiality, comparability, conservatism, costs and benefits

relevance

helps users assess past and future efforts

reliability

can be verified

neutrality

relevance and reliability determine its use, rather than a need to demonstrate a particular result

materiality

level of detail should be at a level that managers can use it for decision making

comparability

comparable between organizations and over time

conservatism

should error in the direction of underestimating benefits and overestimating the potential costs

costs and benefits

cost of obtaining and recording information should be weighed against the potential value of the information obtained

What are health care particular accounting methods?

contractual deductions, fund accounting, funded depreciation

contractual deductions

address the differences between the price charrged for a service and the price paid by third party payers

fund accounting

separates the financial information of one or more department from that of the whole organization. Found in hospitals and large health care businesses.

funded depreciation

set aside money for the addition and/or future replacement of buildings or equipment. this money is invested to earn interest to count the effects of inflation

financial statements

information presented in financial statements and reports; collected over a certain period of time/reported as a specific date

what are common time frames for financial statements

yearly, quarterly monthly, semiweekly

what are common finacial statements for all business?

balance sheet, income statement, cash flow statement

balance sheet

provides information about a business' assets, liabilities and owner's equity as of a specific date (pluses and minuses)

assets

economic resources owned by a business and are expected to beneift future operations

what are examples of assets?

-cash

-investments

-repaid expenses

-inventories

-accounts receivable

-capital assets

-intangibles

liquid assets

cash and assets that can be readily converted to cash

fixed assets

assets that require a long conversion period (ex: building, land)

liabilities

debts of the business

total liabilities

the amount of the business' assets that are owned by its creditors

short-term liabilities

liabilities that are due within one year

long-term liabilities

liabilities not due or payable in more than a year

accounts payable

bills you owe

accrued expenses

value of debts that are held for payment in the future (IE vacation)

notes payable

loans, indicating the loan amount and the interest due. Lines of credit, start-up capital and mortgages are example

owner's equity

aka net worth

the difference between total assets and liabilities

what does owner's equity represent?

the portion of the assets that belong to the onwers

income statement

report on the performance of a business over a specific period of time

what does the income statement compare?

revenue and expenses

net income

the business made a profit and net worth was increased

net loss

the business lost money and net worth was reduced

what are other names for income statements?

-earnings statement

-statement of operations

-profit and loss statement

-revenue and expenses statement

what is a key part of any business plan?

income statement

what is our major income generator in PT?

sales of PT services or related products

operating revenue

revenue from the sale of services or products provided by the company

non-operating revenue

revenue from all other services

expenses

money spent to produce or purchase the services and products sold

what are some expenses?

salaries and benefits, FICA, education, recruitment, supplies, travel, dues, equipment, rent, utilities, communication, environmental services

cash flow statement

tracks the sources, use, and availability of cash

pro forma statements

cash flow statement that looks to the future

EBITDA

earnings before interest tax depreciation and amortization

comparative statements

comparison can be made between elements of the financial statement, amont time periods or between planned (budgeeted) and actual performance

common-size statement

when comparative percentages are used to further define elements of a financial statement

What are financial ratios?

-financial analysis ratios

-liquidity ratios

-capital ratios

-activity ratios

financial analysis ratios

the use of relationships between two quantities that have a management significance

liquidity ratios

assess a business' ability to meet short-term financial obligations (liabilities)

capital ratios

assess the financial structure of the organization, the mix of debt to equity

activity ratios

assesses the use of assets to cover the expenses of the business

what is the common index of liquidity?

current ratio

what is a healthy current ratio?

between 1.2 and 2

what does a healthy current ratio indicate?

company has twice as many current assets as liablities to cover its debts

what does a current ratio <1 indicate?

that the company lacks sufficient liquid assets to satisfy its short-term liabilities

what is the most rigorous test of liquidity?

acid test ratio

what does a higher acid test ratio indiciate?

better business potential to meet its current obligcations

Days cash on hand ratio (DCOH)

the number of days a business could stay in operation without incoming cash receipts

what is an indicator of performance?

Days Cash on Hand Ratio (DCOH)

Days in net accounts receivable

how long it takes to collect money owed (accounts receivable)

what are acceptable figures for days in net accounts receivable?

range from 30-70 days

what would indiciate future liquidity problems?

a long or lengthening collection cycle (high days in net accounts receivable)

what are capital ratios?

-debt service ratio

long-term debt to fixed assets ratio

long-term debt to equity

Debt Service coverage ratio (DSCR)

ability to pay debt related to principle an interest on current debt

what DSCR is required for most lnedors?

minimum 1.25

what DSCR shows lenders you are financially stable and can repay your debts?

2

what does a higher DSCR mean?

potentially lower interest rate

Long-term debt to fixed assets ratio

proportion of fixed assets that are financed through long-term debt

why do lenders use the long-term debt to fixed assets ratio?

lenders use this ratio to determine the business' ability to handle additional debt

what debt-to-equity ratio is deemed risky? safe?

2 = risky

1 = safe

long-term debt to equity

ratio of both sources of long-term funding

what does a higher long-term debt to equity mean?

-greater amount of long-term funding from long-term debt

-harder to obtain additional long-term financing

what are activity ratios?

-operating margin

-return on assets

operating margin

comparison of the economic performance of one business to industry standards, previous performance, and other investment opportunities?

is a higher or lower operating margin better?

higher

what do PT practices operating profit margin average at?

15-30%

what does the operating margin assess?

the relative contribution of one operating unit (department) to another

Return on Assets (ROA)

used to compare to industry standards, previous performance and other investment opportunities

used to select between alternative business strategies

what is considered good and excellent ROA?

5% is good

20% is excellent

is a higher or lower ratio better for ROA?

higher

what are performance indicators for a PT practice?

-volume of referrals

-scheduled treatments

-completed treatments

-visits

-case mix

-revenues