Intro to Financial Statements for vets

Question 1

Objectives (10)

Answer 1

1. Apply basic accounting terminology to vet med
2. understand two main accounting equations
3. Explain difference between ‘cash’ and ‘accrual accounting’ and list pros and cons
4. Understand basic terms/categories related to three main financial statements
5. Be able to explain Goodwill
6. Understand use of ‘Depreciation’ and ‘Amortization’
7. ID key differences in financial statements and tax returns
8. Describe difference between ‘Revenue’ and ‘Income’
9. Demonstrate use of financial ratios to analyze a business
10. Develop an awareness for how the three main financial statements are linked.

Question 2

Two main accounting equations

Answer 2

1. Revenue - Expenses = Net income

2. Owner Equity = Assets - Liabilities

Question 3

Three main financial statements

Answer 3

1. Income statement (profit & loss)
2. Balance sheet (statement of financial position)
3. Cashflow statement

Question 4

Income statement

Answer 4

-aka profit and loss, valued across a period of time

Question 5

Gross revenue

Answer 5

‘sales from client’ or gross sales

Question 6

Net revenue

Answer 6

Revenue minus discounts and other allowances

Question 7

COGS

Answer 7

Cost of Goods sold

1. Direct costs related to patient care that are easily measured
   - inventory (medical/pharmacy/lab)
   - lab send outs
   - NOT USUALLY LABOR

Question 8

Other expense categories on income statement

Answer 8

1. payroll/salaries
2. rent
3. taxes
4. general administrative overhead

Question 9

Revenue vs Income vs Profits

Answer 9

• 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

Question 10

Methods of recording items in profit and loss statement

Answer 10

Cash vs accrual method

Question 11

Cash method

Answer 11

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

Question 12

Accrual Method

Answer 12

Truest more conservative accounting

• Recognized revenue when earned
• Recognizes expenses when obligated

Question 13

Balance Sheet

Answer 13

aka Statement of Financial position (value at a spec time)

Question 14

Current assets

Answer 14

• Cash/cash equivalents
• Accounts receivable
• Inventory
• Supplies

Question 15

Long-Term Assets

Answer 15

more than a year out

• property, plant, equipment
• Intangible assets

Question 16

Current Liabilities

Answer 16

• Accts Payable
• Wages and benefits payable
• Current long term debt due

Question 17

Long term liabilities

Answer 17

• Accounts payable
• Wages and benefits payable
• Current long-term debt due

Question 18

Cash/Cash equivalents

Answer 18

-Use cash to pay people/buy things

Question 19

Account Receivable

Answer 19

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

Question 20

Inventory

Answer 20

Goods to perform services for clients

• surgical implants/catheters/suture
• when used it’s expensed to COGS on INCOME STATEMENT

Question 21

Problems with inventory

Answer 21

Shrinkage

1. Obsolescence
2. Expiration
3. Disappears
   * Too much inventory is a waste of cash

Question 22

Supplies

Answer 22

supplies do NOT equal inventory
Incidental consumables needed for running clinic
-medical/cleaning/office
Not inventoried
Expensed when purchased

Question 23

Improvements

Answer 23

DO NOT EQUAL REPAIRS

Question 24

Intangible assets

Answer 24

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?!?!?!

Question 25

Depreciation

Answer 25

Allocating expenses assoc. with purchase of a tangible asset w/ life cycle longer than 1 yr
-Tangible items

Question 26

Accumulated Depreciation

Answer 26

• 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)

Question 27

Amortization

Answer 27

Allocating expenses associated with non-tangibles

-most common is Goodwill on tax returns

Question 28

Accounts payable

Answer 28

IOUs

• vendors
• inventory received but not paid for yet
• may have net payable discounts

Question 29

Wages and Benefits Payable

Answer 29

• People worked, but get paid every 2 weeks

- Vacation and sick days earned but not used

Question 30

Current portion of long-term debt

Answer 30

Portion of long-term debt due in current financial period

-buying a practice/new equipment

Question 31

Long Term Debt

Answer 31

Balance on long term obligations due beyond current fiscal period
-equiptment/purchase of practice/previous owner non-compete

Question 32

Owner equity/retained earnings

Answer 32

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)

Question 33

Cash flow statement

Answer 33

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

Question 34

Cashflow statement-operations

Answer 34

1. Cash Received-client pays bills
2. Cash used-in paying expenses
3. add back cash from non-cash expenses
   - depreciation/amortization

Question 35

Cashflow statement direct method

Answer 35

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)

Question 36

Cashflow statement indirect method

Answer 36

Exists but we didn’t talk about

Question 37

Cashflow statement-investing

Answer 37

Change in cash related to

-purchase/sale of investments/sale property/sale plant/sale equipment

Question 38

Cashflow statement-financing

Answer 38

Change in cash related to

-issuance or repurchase of own company stock or bonds and payment of dividends

Question 39

Depreciation on the statements

Answer 39

1. Income statement: Expense
2. Cash flow statement: ADD BACK
3. Balance sheet: Accumulated depreciation

Question 40

Ratio analysis-to compare financial statements

Answer 40

1. Allows for comparison of companies of different sizes
   - adjusts for scale
2. Allows for comparison of different periods of same company and show relative trends
3. Allows for comparison to benchmarks
   - AVMA/Vet economics/American Animal Hospital Association

Question 41

Important ratios

Answer 41

1. Inventory turnover ratio
   - shows how many times /yr inventory sold or replaced
   - COGS/AVG inventory or Sales/inventory
2. Days sales of inventory (DSI) = inventory/COGS/365
   - risk of goods expiring before being sold
3. 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