Intro to Financial Statements for vets Flashcards
Objectives (10)
- Apply basic accounting terminology to vet med
- understand two main accounting equations
- Explain difference between ‘cash’ and ‘accrual accounting’ and list pros and cons
- Understand basic terms/categories related to three main financial statements
- Be able to explain Goodwill
- Understand use of ‘Depreciation’ and ‘Amortization’
- ID key differences in financial statements and tax returns
- Describe difference between ‘Revenue’ and ‘Income’
- Demonstrate use of financial ratios to analyze a business
- Develop an awareness for how the three main financial statements are linked.
Two main accounting equations
- Revenue - Expenses = Net income
2. Owner Equity = Assets - Liabilities
Three main financial statements
- Income statement (profit & loss)
- Balance sheet (statement of financial position)
- Cashflow statement
Income statement
-aka profit and loss, valued across a period of time
Gross revenue
‘sales from client’ or gross sales
Net revenue
Revenue minus discounts and other allowances
COGS
Cost of Goods sold
- Direct costs related to patient care that are easily measured
- inventory (medical/pharmacy/lab)
- lab send outs
- NOT USUALLY LABOR
Other expense categories on income statement
- payroll/salaries
- rent
- taxes
- general administrative overhead
Revenue vs Income vs Profits
- Profit or Income is specific
- Net Income: revenue minus expenses (international term)
- Profit: can equal ‘net income’
- Income from operations/operating profit is also a thing
Methods of recording items in profit and loss statement
Cash vs accrual method
Cash method
May overestimate worth of a practice
- Recognizes revenue when it comes in
- Recognizes expenses when the check is written
- Cash in the bank more clearly represents P&L statement
- DOES NOT REFLECT liabilities or expected revenue
Accrual Method
Truest more conservative accounting
- Recognized revenue when earned
- Recognizes expenses when obligated
Balance Sheet
aka Statement of Financial position (value at a spec time)
Current assets
- Cash/cash equivalents
- Accounts receivable
- Inventory
- Supplies
Long-Term Assets
more than a year out
- property, plant, equipment
- Intangible assets
Current Liabilities
- Accts Payable
- Wages and benefits payable
- Current long term debt due
Long term liabilities
- Accounts payable
- Wages and benefits payable
- Current long-term debt due
Cash/Cash equivalents
-Use cash to pay people/buy things
Account Receivable
Money due for services already rendered
- when bill is paid AR goes down and cash goes up
- requires aging (older is more worrisome)
- Allowance for bad debt - goes on balance sheet/income statement
Inventory
Goods to perform services for clients
- surgical implants/catheters/suture
- when used it’s expensed to COGS on INCOME STATEMENT
Problems with inventory
Shrinkage
- Obsolescence
- Expiration
- Disappears
* Too much inventory is a waste of cash
Supplies
supplies do NOT equal inventory Incidental consumables needed for running clinic -medical/cleaning/office Not inventoried Expensed when purchased
Improvements
DO NOT EQUAL REPAIRS
Intangible assets
Goodwill (goodwill impairment)
- value given over and above net value of assets purchased
- not typically expensed/amortized/depreciated on financial statements
- FOR TAX PURPOSES-patents?!?!?!
Depreciation
Allocating expenses assoc. with purchase of a tangible asset w/ life cycle longer than 1 yr
-Tangible items
Accumulated Depreciation
- Each period of depreciation expense on INCOME STATEMENT
- Total is kept on BALANCE SHEET
- IE vet truck
- LAND CANNOT BE DEPRECIATED
- On financial statements generally use a straight line (divide by number of years of useful life)
Amortization
Allocating expenses associated with non-tangibles
-most common is Goodwill on tax returns
Accounts payable
IOUs
- vendors
- inventory received but not paid for yet
- may have net payable discounts
Wages and Benefits Payable
- People worked, but get paid every 2 weeks
- Vacation and sick days earned but not used
Current portion of long-term debt
Portion of long-term debt due in current financial period
-buying a practice/new equipment
Long Term Debt
Balance on long term obligations due beyond current fiscal period
-equiptment/purchase of practice/previous owner non-compete
Owner equity/retained earnings
TRUE VALUE OF A PRACTICE
Owner equity=assets-liabilities
-Record of initial investment (paid in capital and stock)
-Record of draws or disbursements to include dividends to owners
-Grows by increases in Net income (not distributed)
Cash flow statement
Hardest to manipulate Ties balance sheet and income statement -shows source and use of cash True story for accrual accounting -Net income w/o positive cash flow=bad=enron
Cashflow statement-operations
- Cash Received-client pays bills
- Cash used-in paying expenses
- add back cash from non-cash expenses
- depreciation/amortization
Cashflow statement direct method
Compare 2 yrs of balance sheets
Increases in asset accounts
-negative cash (consuming cash to buy stuff)
Increases in liability accounts
-positive cash (buying stuff with other peoples money)
Cashflow statement indirect method
Exists but we didn’t talk about
Cashflow statement-investing
Change in cash related to
-purchase/sale of investments/sale property/sale plant/sale equipment
Cashflow statement-financing
Change in cash related to
-issuance or repurchase of own company stock or bonds and payment of dividends
Depreciation on the statements
- Income statement: Expense
- Cash flow statement: ADD BACK
- Balance sheet: Accumulated depreciation
Ratio analysis-to compare financial statements
- Allows for comparison of companies of different sizes
- adjusts for scale - Allows for comparison of different periods of same company and show relative trends
- Allows for comparison to benchmarks
- AVMA/Vet economics/American Animal Hospital Association
Important ratios
- Inventory turnover ratio
- shows how many times /yr inventory sold or replaced
- COGS/AVG inventory or Sales/inventory - Days sales of inventory (DSI) = inventory/COGS/365
- risk of goods expiring before being sold - Days Sales Outstanding Receivables (DSO)
- how many days outstanding is the Accts receivable
- Accounts receivable/credit sales X 365
- If this number is growing, less client bills paid up front
