Slide 1

Financial Reports

Slide 2

LEARNING OBJECTIVES 1. Compare and contrast the fundamental objectives of a balance sheet and an income statement. 2. Demonstrate the relationship between a balance sheet and an income statement for a given year. 3. Describe the utility of financial ratios and interpret basic financial ratios used in community pharmacy practice. 4. Describe and integrate the financial information depicted in a balance sheet and an income statement in community pharmacy practice. 5. Define the flow of funds involved in community pharmacy practice, including expenses, prescription adjudication, receipt of payment, and revenue generation.

Slide 3

Accounting is the language of business a service activity, whose function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. Accounting : a service activity, whose function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. A major use of accounting is to track the flow of money (cash or credit) between financing and investing activities Assets = owners equity + liabilities

Slide 4

ACCOUNTING PRINCIPLES pharmacy, just as any other type of organization, engages in three fundamental activities: Obtaining financing Making investments Conducting a profitable operation

Slide 5

Obtaining Financing Financing activities to acquire assets involve obtaining funds from 1- owners 2- creditors (i.e., banks). When owners fund the activities of a corporation, they become shareholders of the corporation.

Slide 6

Making Investments In pharmacy settings, funds are invested in acquisition of inventory, computer software and hardware, robotics, buildings, and land. Acquiring the resources necessary to employ the appropriate number of pharmacists, pharmacy technicians, and other staff also can be viewed as an investment activity

Slide 7

Conducting a Profitable Operation Generally, the operating activities of pharmacy settings include: Purchasing Distribution (i.e., prescription-filling activities), Clinical activities Administration Marketing is also a significant operation activity, in that it is required so that others can learn of the goods and services that the pharmacy offers

Slide 8

THREE ESSENTIAL FINANCIAL STATEMENTS

Slide 9

The fiscal year is a unit of timea year as the term impliesthat businesses use to record their financial interactions.

Slide 10

The Balance Sheet Provides a snapshot of an organizations assets, liabilities, and shareholder equity at any particular point in time Balance sheets total assets must equal the total liabilities plus shareholders equity at all times. It does not reveal much about what caused these values to change over the course of the year does not tell us how income was generated and what types of expenses during the accounting period.

Slide 11

The Income Statement Income statement is a dynamic document that provides information about money coming into an organization (income) and money necessary to obtain that income (expenses). The difference between income and expenses is commonly referred to as net income

Slide 12

The Statement of Cash Flows Throughout the fiscal year, the inflows and outflows of cash are recorded in the statement of cash flows These recorded values generally fall into three categories: 1. Operating 2. Investing 3. Financing http://www.investopedia.com/terms/c/cashflowstate ment.asp

Slide 13

FINANCIAL RATIOS Organizations, investors, creditors, and even individuals use financial ratios to examine an organizations financial performance. is a financial analysis comparison in which certain financial statement items are divided by one another to reveal their logical interrelationships Financial ratio is a financial analysis comparison in which certain financial statement items are divided by one another to reveal their logical interrelationships. Data are taken from the balance sheet and income statement for calculating most ratios. They should not be used in isolation from other financial reports

Slide 14

In general, financial ratios allow users of financial information to make comparisons between: A single organization and the entire industry average Differences within an organization over time (e.g., months, quarters, years) Two or more units with a single organization (e.g., pharmacies within the same chain) Two or more organizations with each other (e.g., comparisons between chain pharmacy corporations) Financial ratio analysis is only as valid as the financial information on which it is based.

Slide 15

Slide 16

Profitability Ratios Profitability ratios provide a method to measure the overall financial success of a company The most commonly used profitability ratios are the gross profit margin and the net profit margin. Gross profit margin = (sales cost of goods sold) total sales this ratio provides information on the companys ability to generate gross profits Higher gross profit margin ratios are desirable because they indicate the availability of funds for the companys other expenses

Slide 17

Net profit margin = net income (after taxes) total sales Net profit margin indicates the fraction of net profit that is generated for every riyal of sales Return on assets (ROA) = net income average total assets provides information on the companys ability to generate profits using the companys assets profits can only be generated from the companys assets. Therefore, effective use of assets results in a high ROA ratio

Slide 18

Return on equity (ROE) = net income average owners equity Return on equity, also known as return on investment (ROI), is a measure of how well the company can make profits from funds provided by owners or investors High ROE levels are desirable because investors similar to companiesare interested in maximizing their profits Managers who make better financial decisions are better able to produce higher ROA and ROE ratios for their organizations.

Slide 19

Liquidity Ratios Provide information on the businesss ability to meet its short-term financial obligations The current ratio is the ratio of current assets to current liabilities. Current ratio = current assets current liabilities An organization with a high current ratio is taking fewer risks in meeting its financial obligation

Slide 20

High values greater than 5 This might be a sign of a company that is too conservative, leaving too much of its money in the bank rather than investing it in ways that could help the organization grow (e.g., building new pharmacies or expanding existing services). A low current ratio (