Chapter

The Income
Statement 7

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 Objectives
• Upon completion of this chapter, you will
be able to:
– Describe the accounting treatment of
revenues
– Explain net medical services revenue
– Discuss requirements for minimum pay and
overtime pay
– Explain net income
– Understand income statement analysis
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 Introduction
• Income statement is companion to the
balance sheet
– Reports on revenues, expenses, and net
income over covered time period
– Must be prepared at end of fiscal year
– Often prepared quarterly or monthly

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 Revenues
• Net medical services revenues
– Money expected to be received for medical
services already provided
• Gross medical services revenues
– Money facility would receive if all services
were paid at the full price charged
– Services provided to patients with third-party
payers typically are discounted

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 Revenues (cont’d.)
• Contractual reimbursement examples
– Agreement with third-party payer to charge
reduced amounts for services
– Agreement to provide charity care
– Agreement with government to provide care
at charges set by government
• Accounting treatment
– Record full charge then make adjustment for
the reduced reimbursement
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 Revenues (cont’d.)
• Balance billing
– Billing patients for the difference between a
service’s full charge and the amount paid by a
third party
– Not allowed by government programs and
group insurance contracts
– Not the same as a co-payment in which third
party requires patient to pay part of the
contractually reduced charge

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 Expenses: Salaries and Benefits
• Largest expense category for most
medical organizations
• Federal government regulations
– Fair Labor Standards Act of 1938 (FLSA)
• Requires minimum hourly wage ($7.25 on 7/24/09)
• Non-exempt employees receive overtime pay of at
least 1.5 times base pay for working over 40 hours
in a standard work week
• Exempt: executives, administrators, professionals,
sales, highly paid employees
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 Expenses: Salaries and Benefits
(cont’d.)
• Payroll taxes
– Federal income tax withholding
• Based on data in employee’s W4 form
– Social Security
• Half deducted from employees’ paychecks
• Half paid by employer
• Applies to income below a cap ($110,100 in 2010)
– Medicare
• Similar to Social Security but no income cap

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 Expenses: Salaries and Benefits
(cont’d.)
• Benefits
– Group health insurance
• Employer contribution can be 0–100%
– Other insurances (life, disability, dental)
– Retirement plan
• Can be pension plan paid by employer to eligible
employees
• Can be voluntary contribution by employee with
matching or partly matching funds from employer

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 Other Expenses
• Supplies: routine disposable items
– Medical supplies
– Office supplies
• Contract services
– Janitorial
– After-hours paging service
• Bad debt expense
– Adjustment for unpaid receivables

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 Other Expenses (cont’d.)
• Insurances
– Building and property insurance against
damages from fires, storms, theft, vandalism
– Liability insurance
– Medical malpractice insurance
• Depreciation and amortization
– Annual charges for loss of value of assets
over time

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 Other Expenses (cont’d.)
• Interest paid on loans
– Loan principal payments recorded as
reduction of balance on the loan
• Other expenses
– Any expense that doesn’t fit into standard
categories

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 Net Income
• Net income revenues minus expenses
– Synonyms
• Profit
• The bottom line
• Change in net assets (used by not-for-profit
organizations)

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 Income Statement Analysis
• Ratios used as with balance sheets
• Liquidity (days cash available) ratio
– Number of days that cash and short-term
investments would last based on average
daily expenses
• Solvency (debt service coverage) ratio
– Net income for year compared with highest
annual debt service obligation

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 Income Statement Analysis
(cont’d.)
• Profit level ratio (operating margin and
return on equity)
– Measures efficiency of operation as net
income divided by total revenues
– Important for analysis of publicly traded for-
profit healthcare-related corporations
• Return on equity ratio
– Net income divided by net assets
– Ratio rises if business becomes successful
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 Summary
• Income statement companion to balance
sheet and shows revenues and expenses
• Net medical services revenues reflect
expected revenues after adjusting for
contractual discounts
• Businesses must follow federal and state
regulations about pay and work hours
• Ratios used to analyze operations
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