Financial report

A financial report, sometimes called an annual report, contains a large amount of information and is designed to tell the reader how well a company performed in the preceding year and how this performance compared against various standards. 

We have included parts of an annual report of a fictitious company, Archem, Inc., which we use to explain the terminology and construction of a balance sheet, an income statement, and a retained earnings statement. 

The contents of a financial report may be classified into three distinct parts. The written part, mostly prose, is cast in simple language and is understandable. There may be some words or phrases new to the reader, but any financial jargon is explained in the text in this section, activities for all company divisions are 

One of the most important parts of the third section is the footnotes that are referenced and appended to the financial figures. When reading a financial report, one should always read the footnotes because they explain the sources from which the numbers are derived. Although the style of a financial report has changed through the years, the major three sections have remained intact. 

A financial report contains two significant documents the balance sheet and the income statement. Two ancillary documents often included are the accumulated retained earnings and the changes in working capital statements. In some annual 

About the Author Dr. Mosavin is Chair of the Department of Pharmaceutical Sciences and Associate Professor in the Department of Pharmacotherapy and Outcomes Science at Loma Linda University s School of Pharmacy. Dr. Mosavin received a B.S. in Pharmacy from the University of Kansas, a Ph.D. in Pharmaceutical Sciences from the University of Wisconsin—Madison, and an MBA from the University of Chicago. Dr. Mosavin has experience in pharmaceutical industry, hospital pharmacy, and ambulatory care pharmacy settings. His research interests encompass economic evaluation of health care delivery systems and the role of pharmacists in these systems (especially as it relates to management of chronic diseases by pharmacists). Another key area of his research is analysis of economic gains achieved by health information technology implementation in ambulatory care pharmacy practice. 

After completing this chapter, students should be able to 

Compare and contrast the fundamental objectives of a balance sheet and an income statement. 

Describe the utility of financial ratios and interpret basic financial ratios used in community pharmacy practice. 

---

In constructing her financial report, Noel Carpenter estimates that her real estate holdings have appreciated by 18% since purchase. If the original value was 585,000, what would her balance sheet show now ... 

Revsine L, Collins D, Johnson W (2004) Financial Reporting and Analysis. 3rd edn. Pearson Prentice Hall, Upper Saddle River... 

A basic knowledge of accounting and financial statements is necessary for a chemical professional to be able to analyze a firm s operation and to communicate with accountants, financial personnel, and managers. Financial reports of a company are important sources of information used by management, owners, creditors, investment bankers, and financial analysts. All publicly held companies are required to submit annual reports to the Securities and Exchange Commission. As with any field a certain basic nomenclature is used to be able to understand the financial operation of a company. It should be emphasized that companies may also have their own internal nomenclature, but some terms are universally accepted. In this section, the common terminology is used. 

Long-term liabilities are the amoimts due after 1 year from date of the financial report. They include deferred income taxes that a company is permitted to postpone due to accelerated depreciation to encourage investment, (but they must be paid sometime in the future) and bonds and notes that do not have to be paid within the year but at some later date. The sum of the current and long-term liabdities is the total liabilities. 

American Institute of Certified Public Accountants. Guidelines to Assess Computerized General Ledger and Financial Reporting Systems for Use in CPA Firms. New York AICPA, 1979. 

Before the Internet, if you wanted to learn about an industry or a specific company, you d have to visit a library and read past issues of newspapers, magazines, and newsletters, delve through financial reports, obtain and read annual reports, and find other sources of information. Once you gathered information, you still needed to read it, word for word, to learn as much as possible. 

Tracy, J. A. (1999). How to read a financial report for managers, entrepreneurs, lenders, lawyers, and investors (5th ed.). New York Wiley. 

Describe the basic financial reports used in hospital pharmacy practice. 

Marco and Diana decided to meet once a month for the next 3 months. Over the course of these meetings, they planned to learn more about accounting, financial reports, and their uses in pharmacies. 

Even though they may not be responsible for the organization s financial performance, why is it important for pharmacists to have a basic understanding of the financial reports in their workplace ... 

How do financial reports in hospital pharmacy practice differ in the type and scope of information they contain from the financial reports of a community pharmacy ... 

How would mastering financial reports make a pharmacist a more effective manager ... 

The three financial reports that are essential to the operation of any organization are the balance sheet, the income statement, and the statement of cash flows (Table 15-1). Please note that several other types of financial... 

It also shows the net income for year 1. It is important to understand that the terms net income and earnings are used interchangeably in financial reports. You will note that the net income for year 1 is 300,000. The balance sheet (Table 15-2) shows retained earnings of 200,000. This is the portion of the net income that the owners have reinvested in the business. Where did the rest ( 100,000) of the net income go It was redistributed among owners as dividends (as depicted in Table 15-4). The connection between the net income value from the income statement and retained earnings from the balance sheet is an example of how these two reports are linked. In this particular example, the details of this linkage can be examined by the statement of retained earnings (Table 15-4). 

Financial ratios are classified according to the information they provide. Table 15-6 provides a fist of selected financial ratios used in various pharmacy settings. Different ratios give different pictures of the company s performance and serve different analytical needs. Profitability ratios, liquidity ratios, and turnover ratios are described below. For further discussion of other financial report ratios please refer to Stickney (1999). 

Financial reports used in independent pharmacy practice are very similar to those used in chain community pharmacies. Managers in chain community pharmacies pay attention to the same financial ratios and key indicators on balance sheets and income statements. It was with this knowledge that Marco and Diana decided to spend some time with WHP s owner to gain more insight into the preparation and review of financial reports in community pharmacy practice. 

The revenues on the monthly income statement have to be revised once reimbursements have been received from third-party payers. The reason for making adjustments is that most payers make adjustments to each claim and charge the pharmacy administrative fees. Therefore, the actual amount paid to the pharmacy for prescriptions dispensed is almost always lower than the amount indicated on the Daily Plan Payment report. If the manager fails to revise the revenues, the income statement will show artificially inflated revenue. This can have a number of adverse consequences for a pharmacy including inaccurate financial reports and higher income taxes. In other words, if the revenues are recorded from online adjudications, the pharmacy... 

Finally, the director of pharmacy pays special attention to external financial reports. Professional associations such as the American Hospital Association and the American Society for Health-System Pharmacists publish reports that show the national trends in pharmaceutical expenditures and labor productivity in hospitals (American Hospital Association, 2007 Hoffman et ah, 2005). Pharmacy managers can gauge the efficiency of their operations by comparing their financial ratios and other indicators with national averages. 

Familiarity with basic accounting concepts and preparation of financial reports is essential knowledge for every pharmacist. The financial success of any organization depends on proper management of its funds. Those who understand how organizations finance operations, generate revenue, and allocate financial resources will have a easier task understanding many of the factors that affect their success. 

Most hospital pharmacy budgets contain three major components (1) salary and wage expense, (2) drugs, supplies, and equipment expense, and (3) revenue. Every hospital will have its own format of financial reporting and budgetary summary. Table 34-2 is a hypothetical income and expense report compared with a budget for a 6-month period. 

---