Financial Reports Flashcards
Essential for pharmacy managers to understand the flow of money by interpreting financial report are prepared by
GAAP
What is the language of business?
Accounting
What is the accounting equation?
assets = owner’s equity + liabilities
* Investment in asset (i.e., car) is financed by owner’s equity and liability.
What are the fundamental activities of pharmacies?
- Obtaining financing
- Making investments
- COnducting a profitable operation
When owners fund the activites of a pharmacy they become ____?
Shareholders
What are dividends?
Regular distribution from company to owner
What are the financial statements essential for profitable operations?
- Balance sheet
- Income statement
- Statement of cash flows
Snapshot of the pharmacy’s investments (assets) and how they are financed (liabilities and owner’s equity)?
Balance sheet
Connects the beginning and ending balance sheets in a given period by providing details of perating activities?
Income statement
Connects the beginning and ending balance sheets by indicating the impact of pharmacy’s investments, financing, and operation of money?
Statement of cash flow
What is a fiscal year?
Unit of time that a specific business uses to record its financial interactions
What should a balance sheet include?
- Total assets = total liabilities + shareholder equity
- Retained earnings and dividends
What are included in an income statement?
Provides information about money coming into the pharmacy (income) and money necessary to obtain that income (expenses)
1. Net income
What are categories for recorded values on statement of cash flows?
- Operating
- Investing
- Financing
What is the purpose of financial ratios?
Used to examine a pharmacy’s financial performance
What should the last line of the statement of cash flows equal?
The amount of cash reported on the balance sheet for the beginning of the following fiscal year
What is profitability ratios?
Enables managers to evaluate a pharmacy’s levels of success in generating profits
What are the most common profability ratios?
- Gross profit margin
- Net profit margin
What are the factors that affect profability ratios (esopecially gross profit margin)?
- Drug prices
- Reimbursement formulas in third part contracts
Gross Profit Margin (%)
How do you interpret gross profit margins?
High = preferable and pharmacy has available funds to cover other expenses
* Normal range is between 20-25%
What is net profit margin? How do you interpret it?
High = preferrable
Normal range is between 2-5%
Purpose for net profit margin?
- Determines how well a pharmacy manages expenses
- Compare the performacy of pharmacy locations
- Compare pharmacy’s performace to industry standard
Return On Assets (%)
- Provides information about the pharmacy’s ability to generate profits from the pharmacy’s assets
How do you interpret ROA?
High ratio = effective
Normal value: 5%
Return On Equity (ROE)
Return on investment: provides info about how well a pharmacy can generate profits from funds provided by investors
What is a liquidity ratio?
Provide date on a pharmacy’s ability to meet its short-term financial obligations
Most common liquiditiy ratios?
- Current
- Quic
What is current ratio? How do you interpret it?
High = taking less risks in meeting its financial obligation
* Desirable, but too high shows concerns of conservatism (>5: no signs of investing in future growth)
Low: <2 is not desirable and inability to pay current liabilities
What is quick ratio? How do you interpret it?
Acid test:
Standard: 1.0
> 1.0: more quick assets than current liabilities
<1.0: Cash on hand would be insufficient to pay liabilities
What is a quick assets?
Assets easily converted to cash
What is not apart of assets calculations?
Inventories and prepaid expenses
What is turnover ratio?
Evaluate the efficiency with which a pharmacy uses its assets
Types of turnover rates?
- Inventory turnover
- Recievable turnover
What is inventory turnover? How do you interpret it?
Evaluate how quickly a pharmacy’s inventories are sold
* Inventory turnover ratios < 6.0: benefit from spending money elsewhere
* High = desirable, pharmacy can replace and sell inventory with high efficieny -> higher revenues and profit
* But it can also mean very small inventories
Inventory Turnover Ratio are calculated by?
COGS on income statement (AND)
Average inventory on balance sheet.
days inventory on hand and how do you interpret it?
Dividing 365 by the inventory turnover ratio
Low: more effective inventory management
High: less effective inventory managemtn
What is recievable turnover ratio?
Evaluates how quickly receivables (money owed to the pharmacy) can be turned into cash
What is average collection period?
Calculates the number of days (on average) that credit sales remain in accounts receivable before being collected by the pharmacy.
Dividing 365 by the receivables turnover ratio
What kind of data is in a daily plan payment report?
- Number of scripts filled
- Total amount paid by each third-party payer
- Total copayments made by patients
- Total costs of drug products
