PHRM575---Accounting, financial statements, and financial analysis

Fundamental law of business

A business entity exists to make money for the company, employees, and owner.

Business entity assumption

Business and its records are separate from its owners.

Money measurement assumption

Only transactions that can be expressed in monetary terms are recorded in financial statements.

Double-entry principle

Every transaction has two entries: record of money being received and record of source of money being received.

Cash basis of accounting principle

Revenues are recorded only when cash is received and expenses are recorded only when cash is paid out.

Accrual basis of accounting principle

Revenues and expenses are recognized when the transactions occur (sales when earned, expenses when incurred).

Basic accounting equation

Assets = Liabilities + Owner's Equity

Liabilities

Debts a company owes on its assets.

Owner's equity

Funds contributed by the owner at start-up or during operations.

Two most common financial reports used by managers

Balance sheets and income statements

Balance sheet

Snapshot of financial position reflecting assets, liabilities, and owner's equity at a given point in time.

Current assets

Cash or assets that can be converted into assets easily.

Long-term assets

Value of furniture, supplies, equipment, buildings, and property needed for daily operations.

Current liabilities (examples)

Accounts payable, loans, taxes payable, interest on long-term debts, dividends payable.

Long-term liabilities (examples)

Debts often paid in installments, such as mortgages.

Contributed capital

Initial and subsequent investments in a corporation by stockholders.

Retained earnings

Stockholder equity originating from earnings (profits) reinvested into the business.

Dividends

Payments to shareholders out of current profits or retained earnings.

Income statement (Profit and loss statement)

Combines all sales/revenue and expenses of the business over a period of time to show profitability.

Gross margin formula (dollars)

Total Sales - Cost of Goods Sold (COGS)

Net profit before taxes formula

Sales - COGS - Operating Expenses

Expenses (COGS)

Reflects the cost of the products that generate income.

Retained earnings statement

Describes all transactions affecting a company's net worth over a period of time.

Cash flow statement

Records cash deposits (inflows) and cash outflows to calculate cash balance.

Cash balance

Difference between cash inflow and cash outflow.

Gross margin ratio formula

((Sales - COGS) / Sales) × 100%

Indicated by high gross margin percentage

Efficient purchasing

Net profit (Profit margin) ratio formula

(Net Income / Sales) × 100%

Return on Equity formula

(Net Income / Average Owners Equity) × 100%

Liquidity definition

Ability to meet financial obligations coming due in the short term.

Solvency definition

Ability to survive over a long period of time.

Current ratio formula

Current Assets / Current Liabilities

Quick ratio (acid test) formula

Quick Assets / Current Liabilities

Quick assets components

Cash, short-term investments, and accounts receivable.

Debt-to-total assets ratio formula

Total Debt / (Total Liabilities + Owner's Equity)

Meaning of higher debt-to-total assets ratio

Greater risk of a business being unable to meet its obligations to creditors.

Debt-to-equity ratio formula

Total Liabilities / Owner's Equity

Inventory turnover ratio formula

COGS / Average Inventory Products Sold

Accounts receivable turnover ratio formula

Credit Sales / Average Accounts Receivable

Rx inventory turnover formula

Costs of Goods Sold Over Time Period / Value of Inventory

Revenue Growth Percentage formula

((2024 Revenue - 2023 Revenue) / 2023 Revenue) × 100%

Payroll Expense ratio formula

(Employee Wages + Payroll Taxes + Employee Benefits) / Annual Revenue

Second largest expense in a pharmacy besides inventory

Payroll

Days cash on hand formula (Step 1)

Average Daily Spend = (Annual COGS + Annual Operating Expenses) / 365 Days

Days cash on hand formula (Step 2)

Days Cash on Hand = Ending Cash Balance / Average Daily Spend

Non-Rx gross profit percentage formula

Gross Profits from OTC and Services / Total Gross Profit

Med sync percentage formula

Prescriptions in Med Sync Program for the Month / Total Monthly Prescriptions

Turkey ratio formula

Turkeys / Total Employees

Average PDC score on EQuIPP formula

(Cholesterol PDC% + Diabetes PDC% + RAAS PDC%) / 3

EQuIPP acronym definition

Electronic Quality Improvement Platform for Plans

PDC acronym definition

Percentage of Patients Covered by Rx Claims for Same Drug or Another Drug in Same Therapeutic Class

EBITDA percentage formula

Earnings Before Interest, Taxes, Depreciation and Amortization / Total Revenue

Ideal financial statement frequency

Monthly