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FACHE BOG Exam Study Group

FACHE BOG Exam Study Group. FINANCE Presented by: Edward McKillip, FACHE Director of Finance, Main Line Health. Agenda. Financial Accounting Managerial Accounting Financial Management. Financial Accounting. Financial Statement A. Revenue B. Expenses. Financial Statement. Revenue:

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FACHE BOG Exam Study Group

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  1. FACHE BOG ExamStudy Group FINANCE Presented by: Edward McKillip, FACHE Director of Finance, Main Line Health

  2. Agenda • Financial Accounting • Managerial Accounting • Financial Management

  3. Financial Accounting • Financial Statement A. Revenue B. Expenses

  4. Financial Statement Revenue: • Gross Revenue • Net Revenue • Capitation • Patient Ledger Data • Non-Operating Revenue

  5. Financial Statements • Labor & Fringe Benefits • Net Revenue • Supplies • Equipment • Facilities Expenses:

  6. Financial Accounting Cont. Non-Operating Transactions • Cash Flow Statements & Balance Sheets • Sale/purchase of assets • Incurrence/retirement of Debt • Sale of equity in a for-profit company

  7. Balance Sheet Assets= Liabilities + Equity

  8. Sample Financial Statement

  9. Cash Flow Statements Convert Net Income from accrual based accounting to Cash by adding non-cash expenses back to Net Income. Identifies Cash Flows from providing services, investing and financing activities. Is your organization generating enough income to meet both your short-term and long-term needs.

  10. Sample Cash Flow Statement

  11. Ratio Analysis 4 Different Categories: • Liquidity • Operating • Debt • Profit

  12. Liquidity Ratios Current Ratio = total current assets total current liabilities Acid Test Ratio = cash, marketable securities and Net A/R total current liabilities Collection Period = net accounts receivable average daily operating revenue Days Cash on Hand = cash, marketable securities (operating expenses-depreciation expense)/365

  13. Operating Analysis • Total Asset Turnover • Fixed Asset Turnover

  14. Debt Analysis Long-term debt to fixed asset = long-term debt fixed assets owned Long-term debt to equity = long-term debt equity Debt Service Coverage = (rev-exp) + interest exp + deprec exp Interest expense + principal payments

  15. Profit Analysis Operating Margin Return of Assets Profit Margin

  16. Common Managed Care Rations Medical Claims Expense Ratio = Total Medical Claims Expense Premium Revenue Administrative Expense Ratio = Non-health Service Expense Total Operating Expense

  17. Managerial Accounting Decisions that require cost information: • Pricing (short/long range) • Capital Investment • Discontinuance/sales values • Performance Evaluation

  18. Managerial Accounting Two ways to classify costs: • Relationship to sub-unit being analyzed • Relationship to the volume (amount) of services provided.

  19. Managerial Accounting Total Cost = Total Fixed Costs (TFC) + Total Variable Costs (TVC) Per Unit = TFC + TVC Volume Volume Breakeven Point = TFC CM = Contribution Margin Quantity Equation = TFC + Margin CM Rate Setting Equation = TFC + TVC + Margin CM Contribution Margin = Revenue per Unit – VC per Unit = Price – VC per Unit

  20. Managerial Accounting • Fixed Costs allocated to departments for • Cost Allocations • Cost Process

  21. Managerial Accounting • Cost Allocations vary based on: 1. Allocation Method • Allocation base • Responsibility Center • Depreciation Method.

  22. Managerial Accounting Cost Process requires: • Definition of Cost Centers • Determine Direct Costs of support service centers. • Allocate support cost to service cost centers to determine total costs. • Determine unit cost by dividing total center costs by number of unites provided.

  23. Managerial Accounting Direct Costs Indirect Costs

  24. Indirect Costs Several Key Responsible Centers: 1. Cost Centers – Input only measuresd. 2. Revenue Center – Output only measured. 3. Profit Center – Input and Outputs measured. 4. Investment Center – Inputs and Outputs measured in relation to amount of investment.

  25. Financial Management Capital requirements of the organization are - Costs of doing business. - Costs of staying in business. - Costs of changing business. - Returns of supplies of capital.

  26. Financial Management The Accounting and Economic Costs are • Accounting costs are outputs of the accounting system. • Accounting break-even occurs when revenues = expenses. • Economic costs reflect current market value. • Economic break-even includes a return to all suppliers of capital and requires that total financial requirements be met.

  27. Financial Management Understanding the impact of the Economic Decision: 1. Opportunity Costs 2. Incremental Costs 3. Sunk Costs

  28. Capital Investment Two Key Decision makers: 1. Source of Capital 2. Use of Capital

  29. Capital Investment 2 sources of capital: A. Equity - Contributed Capital - Retained Earnings B. Debt - Short-term Debt - Long-term Debt

  30. Capital Investment Inputs to determine the rate of return on the capital investment: • Cash Flow • Economic Life • Discount Rate • Impact of taxation and/or cost-based reimbursement

  31. Evaluation Techniques Economic Evaluation Technique - Net Present Value (NPV) Accounting Evaluation Techniques Accounting Rate of Return = Average Annual Cash Flow Total Cash Flow

  32. Capital Budgeting Types of capital expenditures: • Land • Land Improvements • Buildings • Fixed equipment • Major moveable equipment • Major repairs

  33. Types of capital expenditure budgets: Replacement - examples • To replace equipment at the end of useful life. • To improve productivity. • To improve quality or because it is required by regulation. New – examples • Expanded service. • Improve safety conditions. • Reduce operating expenses. • Improve patient care.

  34. Capital Budget Process • Budget committee identifies and prioritizes all capital requets. • Department managers project and budget committee confirms cash flows for each capital request. • Budget committee or CFO performs financial analysis on all the requests. • Department manager requesting the capital expenditure identifies non-financial benefits for the request. (ie. Community need or Medical staff policies). • Budget committee evaluates the financial and non-financial benefit for each request and makes decisions.

  35. Evaluating Capital Budgeting Performance Long-term debt-to-net assets = Long Term Debt Net Assets

  36. References Managerial Accounting • Managerial Accounting: An Introduction to Concepts, Methods, and Uses by Maher, Stickney & Weil, 1997. Orlando: Harcourt Brace & Company • The Financial Management of Hospitals and Healthcare Organizations by Michael Norwicki, 1999, Chicago: Health Administration Press • Fundamentals of Financial Management, by Eugene Brigham, 1995, Orlando: Harcourt Brace & Company 36

  37. References Financial Management • The Financial Management of Hospitals and Healthcare Organizations, Fourth Edition, “Capital Budgeting” pp. 187-198 by Michael Nowicki, EdD, FACHE, FHFMA 37

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