Financial data analysis using balance sheets and income statements

Financial Analysis

The balance sheet shows that most line items have a change that is greater that is 5%. This report will attempt to explain the wild fluctuations in the numbers from one year to the next.

With respect to the current assets, the decline in the cash position can probably be explained by the increase in the inventories and the accounts receivable. They are having problems collecting from their customers, apparently, and this has led to a situation where the receivables turnover has decline substantially. The result is that the asset remains as accounts receivable, instead of having been converted to cash. Patton-Fuller's own business might be in decline as well -- revenues are up but inventories are as well. This might point to poor inventory management, since without a decline in revenues the hospital has allowed its inventories to more than double.

With respect to the long-term assets, combined with the long-term liabilities, it is evident that the hospital went deeply into debt in 2009, increasing its net long-term debt by 113.76%. This is matched in part by an increase in plant, property and equipment of 41.29%. The remainder of the increase in debt is not accounted for on the balance sheet -- it should either be in cash or it should be in fixed assets. Instead, it shows as a decline in retained earnings.

This is a problem that, as auditor, I would have significant issue with. There is somewhere around $200,000 unaccounted for. It has been taken out as debt, but not converted into any assets. All that happened is that it knocked the retained earnings down. However, only losses can knock down the retained earnings. The retained earnings shows a decline of nearly $210,000, but the loss for 2009 was just $335. There were no one-time writedowns noted on the financial statements either. As a result, the hospital added debt at the expense of retained earnings, something that cannot happen. Any transaction needs to be recorded on both sides of the balance sheet, not just one. In other words, if the company saw its retained earnings decline and took out debt to cover that, this needs to be evident either from a loss on the income statement, or an addition to assets. An investigation is required into the accounting practices at Patton-Fuller Community Hospital.

With respect to the income statement, there was an increase of 9.89% in the revenue, attributable to an increase in business. Most of the expense categories were held to increases of less than 5%. This shows that the hospital has had fairly strong cost control, keeping its expenses growing at a slower rate than its revenues. The major increase in expenses came with depreciation, which increased by 44.4%. This is roughly in line with the increase of 41.29% in plant, property and equipment. Given that the new property probably depreciates at a faster rate than the old property, given the way most MACRS categories are structured, the increase in depreciation expense is reasonable. The other rapidly increasing expense category is the provision for doubtful expenses. This increased at 10.57%. While this is roughly in line with the increase in the revenues, as would be expected, it is slightly faster, lending credence to the theory that economic conditions in the industry are weakening. Remember that inventories and receivables also increased more quickly than revenues. Given that receivables increased by 56.07%, an increase in the provision for doubtful accounts of 10.57% seems conservative, but that is a matter of hospital policy.

Operating income improved significantly, despite still posting a loss. The ability of the company to grow revenues while keeping most expense categories down was responsible for this effect. Total revenues grew at 9.89% while expenses grew at 5.91%, allowing for 2008's loss to be eliminated. From a business perspective, however, it has to be asked where these new revenues are coming from. It seems as though either they are coming from questionable sources, given the increase in A/R, or they were entirely fictionalized at the end of the period. That would explain why we see an increase in revenue for which payment has not yet been received. This could also leave inventories at a spiked level, since the sales never really took place. Additionally, the fact that the provision for doubtful expenses was not increased in conjunction with the increase in A/R raises some eyebrows. The individual items should be subject to investigation -- they could be legitimate, but there could be an issue of inflating revenues in order to improve the bottom line. Combined with the questionable changes to debt and retained earnings, an auditor would want to ask some tough questions and make sure Fuller-Patton is conducting itself in accordance with GAAP and the laws of the land.