The “ABC’s” of Accounting

1. The “ABC’s” of Accounting

2. A Special Thank You to: Dr. David M. Yousem, M.D., M.B.A.
Professor, Department of Radiology
Vice Chairman of Program Development
Director of Neuroradiology
Johns Hopkins Hospitalfor allowing the use of his material/content in this presentationDr. Yousem’s online lecture series can be viewed at:http://webcast.jhu.edu/mediasite/Catalog/pages/catalog.aspx?catalogId=7e18b7d5-9c63-487e-aaf1-77a86f83b011Dr. Yousem’s project was funded through an RSNA Educational Grant

3. Accounting Overview • Regulatory Agencies • The Balance Sheet • Income Statement • Statement of Cash Flows • Budgets • Accounting Entities • Insurance

4. REGULATORY AUTHORITIES • Financial Accounting • Financial Accounting Standards Board (FASB) • Tax Accounting • Internal Revenue Service (IRS)

5. Financial Accounting Standards Board (FASB) • Has authority to set financial accounting standards • Recognized by: • Securities & Exchange Commission (SEC) • American Institute of Certified Public Accountants (AICPA) • Standards = Generally Acceptable Accounting Principles (GAAP)

6. GAAP Hierarchy • A. Statement of Financial Accounting Standards (FASB) • Greatest authority • B. Technical Bulletins (FASB) • C. Consensus Position. Emerging Issues Task Force (FASB) • D. Accounting Interpretations (FASB) • E. Statement of Financial Accounting Concepts • Least authority

7. Bookkeeping ≠ Accounting • Bookkeeping • Chronological documentation of economic events for later use by an accountant. • Accounting • Integrating and “making sense” of bookkeeping information and preparation of various financial reports to assess financial performance.

8. THE BALANCE SHEET • = Statement of financial condition • Composed of two columns that balance and equal each other: Assets = Liabilities + Retained Earnings • Assets and Liabilities are each divided into two sections: • Current • “An asset or liability that can be liquidated or will come due in the next 12 months.” • Noncurrent • Same as current, except ranges past the next 12 months.

9. Importance of Ratios • Working Capital = Current Assets ÷ Current Liabilities • Ideally a ratio of 2:1 or higher is sought • Measure of how liquid a company is… • The more money and less liability ~ the better off the company

10. Assets (Cash + Accounts Receivable + Inventory) • Quick Assets Ratio (Asset Test Ratio) = (Current Assets-Inventories) ÷ Current Liabilities • Important ratio when a company has a lot of inventory included on the balance sheet • Inventory is the least liquid current asset • Accounts Receivable • Amounts due from patients/insurance companies • Other assets • Deferred: Payments now for next year’s expenses • Intangible Assets • Fixed Assets: Property, plant, and equipment

11. Liabilities • Debt + Accounts Payable + Accrued Expenses + Stockholders Equity • Debt • Typically, real estate and equipment purchases in radiology practices • Accounts Payable • Amounts owed to vendors/suppliers • Accrued Expenses • Items expensed but not yet paid for. • e.g. Taxes, Salaries, Legal Fees

12. INCOME STATEMENT • Summary of income and expense items for a given period of time • Contrary to Balance Sheet, which looks at a specific date • Bottom Line (Profit) = (Income – Expenses) • Other names: • EBT (Earnings before taxes) • EBITDA (Earnings before interest, taxes, depreciation, & amortization)

13. STATEMENT OF CASH FLOW • Summary of inflow and outflow during a specified period • Critical to assessing the immediate needs of the company • Primarily relating to liquid assets • Balance Sheet + Income Statement + Statement of Cash Flow • Basic components to financially evaluate a business

14. BUDGETS • Important to establish benchmarks for a company to compare actual performance • “Variances” = deviations in the budget • “Red Flags” = Large deviations/fluctuations • Budgeting for internal use only • Need both annual and long-term budgets • Useful models: • Rolling forecasts- prior year plus percentage increase • Allow performance evaluation of different segments within the company

15. BUDGETS • Profit Margin = Operating Income ÷ Revenues • Most budgets forecast to operating income (profit) • Also called EBIT (Earnings before interest and taxes) • Revenue is proportional to volume • Variable expenses change in proportion to revenue • Fixed expenses to be considered: • Rent, Salaries, Benefits, Insurance • Depreciation • Must be incorporated in budget, with a tax benefit if deducted on accelerated basis • Based on IRS general depreciation systems

16. ACCOUNTING ENTITIES • Three entities in radiology private practice • C corporation • Partnership/pass-through entity • Partnership • S corporation • Limited liability company (LLC) • Sole proprietorship

17. C Corporation • Regular corporation • File annual income tax • Pay tax on taxable income • Note: THE STOCKHOLDERS PAY ANOTHER TAX ON DIVIDEND DISTRIBUTIONS (Double Taxation)

18. Partnership/Pass-through Entities • File annual tax returns, but do NOT pay income taxes • Each return issues a Form K-1 to each investor • Reports the percentage share of each income & deduction for each investor • Investors report their share of income and deductions on their respective tax returns • Essentially, taxation only at investor level

19. S Corporation • Must meet certain criteria • Can only have a single class of stock (no common or preferred stock) • 75 or less stockholders • Shareholders have limited liability • Only their investment is at risk • If sued, the assets of the corporation, not the investors’, are available for collection.

20. Partnership • Similar to S Corporation • Any number and types of partners • General Partnership • All partners are general and all are fully liable for partnership debts • Partners may have to contribute additional assets to satisfy debts • Limited Partnership • One general partner and numerous limited partners • Limited partners liable for debt only up to their investment

21. LLC – Limited Liability Companies • Hybrid of C corporation & partnership • Can be taxed as either C corp or partnership if >1 partner • If one member only, can be taxed as C corp or as “disregarded entity” • Report income and deductions on personal tax return • No Form K-1 • Members liable only for their extent of their investment • Similar to S corp • No requirement that member has general liability for LLC debts

22. State-dependent restrictions • In many states, professional practices not allowed to organize as LLC’s, partnerships, or C corporations • Separate entities • Professional Associations (PA) • Professional Corporations (PC) • Professional Limited Liability Companies (PLLCs) • Must be licensed by state authority (medical board) • Taxed like C corporation or pass through entity • Can protect each investor from the liability of the other members malpractice

23. INSURANCE • In addition to malpractice insurance…. • Umbrella Policy • Disability Insurance • Key-man Insurance • Can fund any buyouts in multi-partner practices • Life insurance is paid out to the practice, which is then used to purchase the deceased doctor’s interest in the practice from the heirs

24. Personal Life Insurance • Consider establishing an Irrevocable Life Insurance Trust (ILIT) • Usually insurance benefits pass tax-free to beneficiaries, but proceeds are included in your gross estate, thus subject to income tax • If policy purchased and owned by ILIT, insurance proceeds should not be included in your estate, thus not taxed • Also, deducting disability insurance premiums is generally not recommended, despite their short-term tax savings • If they are not deducted, upon payment they will not be taxed

25. Additional Resources/Reading • ACR Residents & Fellow Section on Dollars & Sense http://rfs.acr.org/dollars_sense/ • Radiology Business Practice: How to Succeed. Ed. David M. Yousem & Normal Beauchamp, Jr. Saunders/Elsevier 2008.

26. Credit and Additional Resource • All information herein is based on the book, “Radiology Business Practice: How to Succeed” (Ed. David M. Yousem & Norman J. Beauchamp, Jr)