Introduction
This paper is based on the Patton Fuller Community Hospital’s Annual Report for the year 2009. Physicians work at the hospital and own it too. They also govern the hospital together with the CEO and CFO. Despite sitting on the board, the CEO and CFO have no voting rights. This hospital aims at making a profit from its operations. The hospital obtains most of its revenue from in-patients rather than outpatients.
In the current year, the hospital took on additional debt. This debt was issued at an adjustable interest rate. Thus, the CFO has had to create a contingent liability in the financial statements in case the debt interest increases. PFCH has some investments that performed poorly this year. The loss has been recognized in the financial statements. On the up side, the hospital will receive some funds from a deceased benefactor’s estate. The auditor’s report was unqualified.
Audited vs. Unaudited Financial Statements
Patton Fuller’s audited and unaudited financial statements are similar except for one line item. The expense ‘Provision for Doubtful Accounts’ had been understated in the unaudited accounts.
This was adjusted in the annual report. Prior to the adjustment, the Statement of Revenue and Expenses indicated that the hospital had met its goal of profit-making and made $689,000. Unfortunately, after the adjustment, the hospital’s profit was reduced to a loss of $373,000. Net profit was overstated by double the amount. Clearly, the hospital is doing quite badly financially (Atrill, 2011).
This increase in provision for doubtful debts also affected the Balance Sheet. The amount under receivables was adjusted downwards. To complete the double entry, retained earnings were also adjusted downwards. This difference is material as it can affect a decision made based on the financial statements. Supposing the financial statements were not audited, they would have misled readers to believe that the hospital was profitable.
Revenue and Expenses
Patton Fuller obtains its revenue from patients who use its services. Most of the revenue is from inpatients. However, in the current year, some third parties have been introduced. They will cover the patients’ hospital fees, but at a different rate than the normal. They are likely to pay less than the patients owe. This is the reason for the $1,000,000 adjustment.
The Balance Sheet shows the amount of receivables owed to the hospital by patients. PFCH’s receivables are approximately 20% of revenue. The hospital needs to improve is debt collection. The fact that the revenue will now be received from a third party has affected Financial Reporting.
It has resulted in the increase of the allowance for doubtful debts (Barrow, 2011). The major expenses are Salaries, Benefits, Physician, and Professional Fees. It is possible that the physicians are paying themselves at a rate higher than the market rate. However, Professional fees are fixed and unavoidable.
PFCH has organized its revenue into three different categories. Net Patient Revenue is obtained from the hospitals core business, while investment revenue is obtained from its stocks and other assets. Expenses are organizes by function.
Conclusion
Financial reporting provides useful information for investors and management to use in decision-making. The integrity of Financials can be increased by subjecting them to an audit. In the case of PFCH, audit adjustments reduced the supposed profit to a significant loss. The hospital should consider allowing management professionals to sit in the board and have voting rights. This might improve its financial management and lead to profit making.
References
Atrill, P. (2011). Financial Management for Decision Makers. Chicago: Prentice Hall.
Barrow, C. (2011). Practical Financial Management: Key Financial Statements Tools of Financial Analysis Business Planning and Budgeting. New York: Kogan Page.