admin exam 1 - financial man.

Question 1

Accounting

Answer 1

A service activity whose function is to provide quantitative information, primarily financial in nature, about economic entities that are intended to be useful in making economic decisions

Provides the framework for critical decision-making processes essential for the success of any organization

Tracks the flow of money (cash or credit) between financing and investing activities - tracks flow of what is coming in and what is going out

Determines profitability, future growth, and tax liability

Question 2

Accounting

Answer 2

Assets = owner’s equity + liabilities

Assets are things that a business owns that can be used to generate income

Obtaining the money needed to acquire an asset requires financing

Liabilities are money owed to others

Owner’s equity is the owner’s own funds

Question 3

3 Fundamental activities of accounting in pharmacy

Answer 3

Obtaining financing

Making investments

Conducting a profitable operation

Question 4

Obtaining financing (to acquire assets)

Answer 4

Necessary in any business

Involves obtaining funds from business owners as well as creditors

Owners who fund the activities of a corporation are the shareholders

Shareholders have a claim on the company’s assets and their investment results in either regular distributions from the company (dividends) or an increase in the value of the company’s total assets leading to a profitable operation

Creditors provide funds but require the company to repay the funds with interest over a specified period of time

Question 5

Conducting a profitable operation

Answer 5

Involves
- Obtaining financing
- Investing funds to acquire needed assets
- Operational activities, purchasing, drug distribution, clinical activities and administration
- May also include marketing

Question 6

What is a fiscal year?

Answer 6

A unit of time that businesses use to record their financial interactions

Can start on January 1 or any other date and end 1 year later

Many businesses do not use January 1
- Why? In small groups come up with a couple of reasons why a business would choose a different fiscal year cycle

why would January 1 not be a good fiscal year? you would be wrapping up business during the holiday because, between October 31 and December 31st, not a lot goes on so people may not be as available to do business

Question 7

3 essential financial statements

Answer 7

Table 21-1
Balance sheet
Income statement
Statement of cash flow

Question 8

The balance sheet

Answer 8

Provides a snapshot of an organization’s assets, liabilities, and shareholder equity at a particular point in time.

Does not reveal much about what caused these values to be what they are or to change over the course of time

Does not tell how income was generated and what types of expenses were incurred during the accounting period

Question 9

The income statement

Answer 9

A dynamic document that provides information about money coming into an organization (income) and money necessary to generate that income (expenses)

Connects the beginning and ending balance sheets in any given period of time by providing the details of operating activities such as sales and expenses

The difference between income and expenses is net income, net profit, or earnings

Question 10

Statement of cash flow

Answer 10

Connects the beginning and ending balance sheets by indicating the impact of the company’s investments, financing, and operations on cash flows

Records the inflow and outflow of cash or money

Typically separates values into three categories: operating, investing, and financing

Question 11

Linking the financial statements

Answer 11

The last line in the statement of cash flow indicates the amount of cash available at the end of a fiscal year

The last line in the statement of cash flow is always the same as the amount of cash recorded on the balance sheet for the beginning of the following fiscal year

The reports are fluid and are linked to each other

Question 12

Financial ratios (Table 21-6)

Answer 12

Profitability ratios

Liquidity ratios

Turnover ratios

Allow users of financial information to make comparisons between
- A single organization and the entire industry average
- Differences within an organization over time
- Two or more units within a single organization (pharmacies within the same chain)
- Two or more organizations with each other (comparisons between chain pharmacy corporations)

Question 13

Profitability ratios

Answer 13

Measures overall success in the daily operations of a business since profit is the goal

Gross profit margin = (sales – cost of goods sold) / total sales – do not need to know but know how it works

Provides information on the company’s ability to generate gross profits

Higher gross profit margin ratios indicate the availability of funds for the company’s other expenses so higher ratios are most desirable

Question 14

Profitability ratios

Answer 14

Net profit margin = net income(after taxes) / total sales

Indicates the fraction of net profit that is generated for every dollar of sales

Question 15

Liquidity ratios

Answer 15

Provide information on the business’s ability to meet its short-term financial obligations

The current ratio is the ratio of the current assets to current liabilities

Current ratio = current assets / current liabilities

An organization with a high current ratio is taking fewer risks in meeting financial obligations

Question 16

Liquidity ratios

Answer 16

The quick ratio that an organization strives to obtain is 1.0

A quick ratio greater than 1.0 means that the organization has more quick assets than current liabilities.

Having a quick ratio of less than 1.0 means that the cash that the organization has on hand is not sufficient to pay all its current liabilities

Quick ratio = (current assets – inventory – prepaid expenses) / current liabilities

Question 17

Turnover ratios

Answer 17

Measures the efficiency with which an organization uses its assets

Also referred to as efficiency ratios or asset utilization ratios

The two most commonly used are inventory turnover and receivables turnover

Inventory turnover ratio = cost of goods sold/average inventory (at cost)

Question 18

Inventory turnover ratio

Answer 18

Measures how quickly, on average, an organization’s inventory is sold

Low inventory ratios indicate that the organizations inventory is too large for its operations and that cash could be better spent elsewhere that is tied up in inventory

High inventory ratios are desirable and mean that the organization is able to sell and replace its inventory efficiently and therefore generate higher revenues and profits

Question 19

Financial reports in community pharmacy practice

Answer 19

Financial ratios

Balance sheet

Income statement

Include Third-party plan payer reports

Evaluate assets, liabilities, income, cost of sales, general and administrative expenses, net income

Question 20

Financial reports in hospital pharmacy practice

Answer 20

Different than those used in community pharmacy

Consist primarily of information on inventory costs and labor costs
- Fluctuations in inventory costs
- FTEs and labor costs (overtime avoidance)

Part of a global hospital budget

Also, look at
- Patient days
- Case mix index
- Drug cost per patient day
- Labor cost per patient day

Question 21

What is a budget?

Answer 21

A detailed plan expressed in quantitative terms

Specifies how resources will be acquired and used during a specified period of time

Question 22

Budgeting systems

Answer 22

The procedures used to develop a budget constitute a budgeting system

Budgeting systems have five primary purposes
- Planning
- Facilitating communication and coordination
- Allocating resources
- Controlling profit and operations
- Evaluating performance and providing incentives

Question 23

Types of budgets

Answer 23

Master budget (ties together all phases of a pharmacy’s operation)

Budgeted financial statements (Pro forma financial statements)

Capital budget

Financial budget

Short-range budget

Long-range budget

Rolling budget (revolving or continuous)

Operational budget

Question 24

Master budget components

Answer 24

See table 22-1 in text
Understand the schedules used to construct a master budget (Sales/Operational/Budgeted Financial Statements)
- Sales of services or goods
- Inventory
- Materials
- Labor
- Overhead
- Administration

Question 25

Assumptions and predictions in budgeting

Answer 25

What assumptions do you think are necessary for budgeting?
- need as much money as last year

What predictions do you think are necessary for budgeting?

Question 26

Budget administration

Answer 26

The pharmacy manager
- Responsible for preparing/proposing the budget
- Responsible for meeting the approved budget

Often the proposed budget is not what is approved and what you have to work with

Budget cycles are fiscal years and then broken down into smaller time periods (month/week)

Budgets should be shared with staff or include staff in preparation to increase understanding, buy-in, and support

Question 27

Budget administration

Answer 27

Budgets should be re-visited at staff meetings and during one-on-one discussions with staff

The pharmacy manager may delegate responsibility for line-items in the budget to managers of record, supervisors and staff

Question 28

The behavioral impact of budgets

Answer 28

The budget affects everyone in the organization

Staff and managers affect the success of the budget (meeting the budget) in what they do every day

What are some of the behaviors in community pharmacies that affect the budget daily?

What are some of the behaviors in institutional pharmacy practice that affect the budget daily?

Question 29

Behavioral impact of budgets

Answer 29

Budgetary Slack: Padding the Budget
Examples:
Regional community pharmacy manager under-estimating the anticipated level of sales
Over-estimation of human resource costs

Question 30

Behavioral impact of budgets

Answer 30

Why would a manager pad the budget with budgetary slack?
- Their performance may be viewed more positively if they “beat the budget” (save money)
- Padding can be used to account for unforeseen events during the budget cycle
—-Necessary purchase of capital equipment
—-Overtime costs to cover open shifts or fluctuations in business

Question 31

Behavioral impact of budgets

Answer 31

Padding the budget:
Is it ethical?
Does it happen routinely?

Question 32

Participative budgeting

Answer 32

Employees throughout the organization are involved in the budgetary process

Gives employees a sense of ownership of the budget

Can lengthen the process and cause delays

The manager needs to be diligent in addressing un-realistic expectations and padding

Question 33

Costs of poor financial behaviors on budgets and employers

Answer 33

What are some behaviors that could negatively impact the budget in community pharmacy

What are some behaviors that could negatively impact the budget in hospital pharmacy

Question 34

The financial planning process

Answer 34

Determine current financial situation
Develop financial goals
Identify alternative courses of action
Evaluate alternatives
Create and implement a financial action plan
Re-evaluate and revise the plan
Another example of continuous quality improvement
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