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Qais AlefanB.Pharm, R.Ph., M.Pharm, PhD
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Accounting is a service activity, whose function is toprovide quantitative information, primarily financial in
nature, about economic entities that is intended to be useful
in making economic decisions
Accounting provides the framework for critical decision-making processes essential for the organization success
Accounting is the dynamic process which determine and
report how corporations and individuals finance their
activities and use their money A major use of accounting is to track the flow of money
(cash or credit) between financing and investing activities
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Understanding financial reports is essential to understanding theflow of money
If your goal is to operate a taxicab, you need to obtain a car. The
car is an asset
Assets are things that a business owns & used to generate income Obtaining the money needed to acquire an asset requires
financing
Financingmay come from a combination of personal savings,
gifts, a bank loan, or even money borrowed from friends andrelatives
These sources of financing can be further classified as liabilities
(money owed to others) and owners equity (owners own funds)
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Ifyou paid $25,000 for the car, the value of yourasset is recorded as $25,000
Now lets say that you financed this asset by
putting up $10,000 of your own money and getting
a $15,000 from your bank
In accounting language, this investment in the
asset ($25,000 for the car) is financed by owners
equity ($10,000) and a liability ($15,000)
This brings us to the most important rule in
accounting, often referred to as the accounting
equation: Assets =owners equity + liabilities
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Accounting principles are essential tools
that can be applied in all areas of
pharmacy practice
This is so because any pharmacy engagesin three fundamental activities: Obtaining financing
Making investments
Conducting a profitable operation
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To start a business, one needs to acquire assets
Financing activities to acquire assets involve obtaining funds fromowners and creditors
When owners fund the activities of a corporation, theybecomeshareholders
Shareholders have a claim on the companys assets, and theirinvestments in the company are rewarded by either: regular distributions from the company to the owners (also known as
dividends) an increase in the value of companys total assets owing to profitable
operations
Creditors provide funds to the company but do not receivedividends
They require the company to repay the funds with interest over aperiod of time
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The types of investments a company makes
depend on the type of business it is conducting
In pharmacy settings, funds are invested in
acquisition of inventory, computer softwareand hardware, robotics, buildings, and land
Acquiring the resources necessary to employ
the appropriate number of pharmacists,
pharmacy technicians, and other staff also canbe viewed as an investment activity
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The operating activities of pharmacy settings
include: Purchasing
distribution (i.e., prescription-filling activities)
clinical activities
administration
In many pharmacies, marketing is also a
significant operation activity, in that it isrequired so that others can learn of the goods
and services that the pharmacy offers
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There are three types of financial statements that areessential to the operations of any organization
The fiscal year is a unit of time -a year- that
businesses use to record their financial interactions
A fiscal year can start on January 1 and end on
December 31, or on other date and end 1 year later
The three financial reports that are essential to the
operation of any organization are the balance sheet
the income statement
the statement of cash flows
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Provides a snapshot of an organizations
assets, liabilities, and shareholder equity at
any particular point in time
Organizations generally prepare a balancesheet at the end of a fiscal year, or at any
point in time
The balance sheets total assets must equal
the total liabilities plus shareholders equityat all times
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Provides information about money cominginto an organization (income) and money
necessary to obtain that income (expenses)
The difference between income and expensesis referred to as net income, net profit, or
earnings
Tells what happens to an organization over a
period of time
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Records the inflows and outflows ofcash throughout the fiscal year
These recorded values generally fallinto three categories: operating,investing, and financing
The last line in the statement of cashflows, indicating the amount of cashavailable at the end of a fiscal year, isalways the same as the amount of cashrecorded on the balance sheet for thebeginning of the following fiscal year
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Examine an organizations financialperformance & success
Net income/average total assets,
provide useful information on theprofitability
Data are taken from the balance sheet
and income statement for calculating
most ratios
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Measure the overall financial success of a company
The most commonly used are the gross profit margin
and the net profit margin
Gross profit margin = (sales - cost of goods sold)
total sales
Provides information on the companys ability to
generate gross profits
Highergross profit margin ratios are desirablebecause they indicate the availability of funds for the
companys otherexpenses
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Net profit margin = net income (after taxes) total sales
Indicates the fraction of net profit that is
generated for every dollar of sales
Return on assets (ROA) = net income
average total assets
Provides information on the companys ability
to generate profits using the companys assets
Effective use of assets results in a high ROA
ratio
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Return on equity (ROE) = net income average owners equity
Also known as return on investment (ROI),
is a measure ofhow well the company canmake profits from funds provided by
owners or investors
High ROE levels are desirable because
investors are interested in maximizing theirprofits
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Assess thebusinesss ability to meet its short-term financialobligations
Current ratio = current assets current liabilities
A high current ratio means fewer risks in meeting financial
obligations
An alternative ratio is the quick ratio (known as the acid test)
Quick assets: assets that are easily converted to cash
Provides abetter picture of a companys liquidity and its abilityto meet its financial obligations
Quick ratio = (current assets - inventories - prepaid expenses)
current liabilities
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Measure the efficiency with which an organization usesits assets
Inventory turnover ratio = cost of goods sold averageinventory
Measures how quickly an organizations inventories aresold
The data for this ratio come from two differentfinancial statements
Cost of goods sold (COGS) is found on the income
statement, and the average inventory comes from thebalance sheet
Remember that one can achieve a high inventory ratioby keeping a very small inventory
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Receivables turnover ratio = credit sales averageaccounts receivable
Measures how quickly receivables (money owed to
the organization by others) are turned into cash
If you divide the receivable turnover ratio by 365,
you will have a ratio known as the average collection
period
The average collection period indicates the numberof days (on average) that credit sales remain in
accounts receivable before they are collected
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Familiarity with basic accounting concepts andpreparation of financial reports is essential
knowledge for every pharmacist
The financial success of any organizationdepends on proper management of its funds
Those who understand how organizations
finance operations, generate revenue, and
allocate financial resources will have easier taskunderstanding many of the factors that affect
their success
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