Financial Reports. LEARNING OBJECTIVES 1. Compare and contrast the fundamental objectives of a balance sheet and an income statement. 2. Demonstrate the.
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Financial Reports
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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.
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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
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ACCOUNTING PRINCIPLES pharmacy, just as any other type of
organization, engages in three fundamental activities: Obtaining
financing Making investments Conducting a profitable operation
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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.
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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
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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
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THREE ESSENTIAL FINANCIAL STATEMENTS
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The fiscal year is a unit of timea year as the term impliesthat
businesses use to record their financial interactions.
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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.
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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
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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
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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
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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.
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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
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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
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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.
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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
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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 (