The “ABC’s” of Accounting
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 Hospital
for allowing the use of his material/content in this presentation
Dr. Yousem’s online lecture series can be viewed at:
http://webcast.jhu.edu/mediasite/Catalog/pages/catalog.aspx?catalogId
=7e18b7d5-9c63-487e-aaf1-77a86f83b011
Dr. Yousem’s project was funded through an RSNA Educational Grant
Accounting Overview
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Regulatory Agencies
The Balance Sheet
Income Statement
Statement of Cash Flows
Budgets
Accounting Entities
Insurance
REGULATORY AUTHORITIES
• Financial Accounting
– Financial Accounting Standards Board (FASB)
• Tax Accounting
– Internal Revenue Service (IRS)
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)
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
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.
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.
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
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
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
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)
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
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
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
ACCOUNTING ENTITIES
• Three entities in radiology private practice
– C corporation
– Partnership/pass-through entity
• Partnership
• S corporation
• Limited liability company (LLC)
– Sole proprietorship
C Corporation
• Regular corporation
– File annual income tax
– Pay tax on taxable income
• Note: THE STOCKHOLDERS PAY ANOTHER TAX ON
DIVIDEND DISTRIBUTIONS (Double Taxation)
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
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.
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
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
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
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
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
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.
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)