6 Financial Reports

7/31/2019 6 Financial Reports

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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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Documents

6 Financial Reports