PGDHHM ASSIGNMENT

SUBJECT: FINANCIAL MANAGEMENT

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1. How will you define concepts of Accounting? How is it applicable in the Hospitals?
Ans.: Ground rules of accounting that are (or should be) followed in preparation of all accounts and financial statements. The four fundamental concepts are : (1) A ccruals concept: According to the accrual concept, any transaction, in normal business, is recognized moment it occurs. For example, a patient is treated, but has not paid, revenue is still recognized, interest / installment of a loan is due to be paid, but not paid, it is recognized. This is not to be confused with the principle of conservatism. Suppose you foresee that the patient may not pay, then you would provide for a loss against this, otherwise still recognize this as income. In the second case, if you are negotiating for reduction in interest and that is the reason you have not paid, then the reduction will be recognized only after it occurs, till that time you still record that interest / installment of loan has to be paid. ) (2) Consistency concept: once an entity has chosen an accounting method, it should continue to use the same method, except for a sound reason to do otherwise. Any change in the accounting method must be disclosed; ) (3) Going concern: it is assumed that the business entity for which accounts are being prepared is solvent and viable, and will continue to be in business in the foreseeable future; (4) Prudence concept: revenue and profits are included in the balance sheet only when they ) are realized (or there is reasonable 'certainty' of realizing them) but liabilities are included when there is a reasonable 'possibility' of incurring them. It is also called conservation concept.

Other concepts include  Accounting equation: total assets of an entity equal total liabilities plus owners' equity;  Accounting period: In order to know the results of the entity / business operations and financial position of the firm periodically, accounts are closed and reported for / after specific periods of time, referred to as accounting periods. The Income / revenue, expenses, etc, are measured for these periods and the financial position is assessed at the end of an accounting period.  Cost basis: asset value recorded in the account books should be the actual cost paid, and not the asset's current market value;
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 Entity: accounting records reflect the financial activities of a specific business or organization, and not of its owners or employees; For purposes of accounting, the business firm / economic activity whether it is clinic or a hospital or a consulting practice the business regarded as a separate entity, separate from its owners. It may be a single doctor for consulting or it may be group of doctors for a polyclinic or it may be a large number of people who have started a hospital. Accounts are maintained for this entity which is the business as distinct from the persons who are connected with it. The accountant records transactions as they affect the business. The entity which is the business has transactions with its owners, creditors, suppliers, employees, customers/patients.

 Full disclosure: financial statements and their notes (footnotes) should contain all pertinent data;  Lower of cost or market value: inventory is valued either at cost or the market value (whichever is lower) to reflect the effects of obsolescence;  Maintenance of capital: profit can be realized only after capital of the firm has been restored to its original level, or is maintained at a predetermined level;  Matching: transactions affecting both revenues and expenses should be recognized in the same accounting period;  Materiality: relatively minor events may be ignored, but the major ones should be fully disclosed;  Money measurement: Accounts are kept only for those facts and transactions which can be measured in or are expressible in monetary terms.Anything that cannot be measured in money terms is ignored in accounting. All elements of the business which may be as diverse as land, building, hospital and other equipment, money due from patients, money to be paid to suppliers, investments made, inventories, money borrowed from banks, loans, securities, and even goodwill has to be expressed in numbers, which is their monetary value, and then can be meaningfully read, understood, analyzed and compared.  Monetary measurement: only the activities measurable in terms of money should be recorded;  Objectivity: financial statements should be based only on verifiable evidence, comprising an audit trail;  Realization: any change in the market value of an asset or liability is not recognized as a profit or loss until the asset is sold or the liability is paid off (discharged);

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 Unit of measurement: financial data should be recorded with a common unit of measure (dollar, pound sterling, yen, etc.). Also called accounting conventions, accounting postulates, or accounting principles.

2. How will you define Depreciation ? How it is considered in the Hospital setup?
Ans.: Depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay or other such factors. In accounting, depreciation is a term used to describe any method of attributing the historical or purchase cost of an asset across its useful life, roughly corresponding to normal wear and tear. It is of most use when dealing with assets of a short, fixed service life, and which is an example of applying the matching principle per generally accepted accounting principles. Depreciation in accounting is often mistakenly seen as a basis for recognizing impairment of an asset, but unexpected changes in value, where seen as significant enough to account for, are handled through write-downs or similar techniques which adjust the book value of the asset to reflect its current value. Therefore, it is important to recognize that depreciation, when used as a technical accounting term, is the allocation of the historical cost of an asset across time periods when the asset is employed to generate revenues.

Goods that are purchased for use in a business can be depreciated to account for normal wear and tear. Most light equipment, such as computers, is depreciated over 3 years. It helps the business to prepare to replace the items after their normal life cycle by allowing them to deduct part of the value each year. Other items are depreciated over longer periods of time, 5 or 10 years. There are General Accounting Principles and tax regulations that provide details on how and what items are depreciated.

Although depreciation does NOT help a business replace assets it does gives some allowance to how their purchase is reported. A portion of the asset value is charged to the profit and loss as depreciation to reflect the portion that is received as a benefit in that period, and the remaining book value of the asset is kept on the balance sheet. Some assets will provide dimishing returns over their lifetime, thus the depreciation charge reduces in subsequence periods (e.g. reducing balance method), some assets will provide consistent usefulness and thus the charge is consistent (e.g. straight line method).

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The main things are the work of depreciation. The depreciation is worked in very simple way just suppose a business earns profit of 50,000 $ and distribute this profit among the proprietors, in the second situation the same business earns 50,000$ and charged depreciation 5000$ and distribute the remaining profit i-e 45,000$ it means 5000$ are still in the pocket of business which will utilized by it at the time of purchasing the new asset after disposed off this old one. And this is the function of depreciation to maintain the liquidity of business at the time of acquiring the new asset which requires a bulk of money. A recent study examining accounting practices currently being used to prepare annual hospital financial statements indicates relatively little diversity, regardless of organizational type or size. The study's findings should interest those concerned with healthcare accounting and financial reporting issues, especially healthcare administrators and members of standards setting boards who participate in accounting policy deliberations. Typical sources of data on accounting methods used in hospitals--such as annual reports and Forms 10K--are neither readily available nor thorough. Therefore, in order to properly assess the extent of accounting practice diversity in hospitals (the largest sector of the healthcare industry), 1,500 CFOs listed in the 1989 American Hospital Association Guide to the Health Care Field were surveyed. Hospital financial statements should accurately reflect the depreciated cost of their building's structure. For hospitals to be reimbursed for the allowable expense, their financial executives needed to be able to compute depreciation. Computing depreciation requires two types of information: * A record that reflects the cost or value of the hospital's assets * A life over which financial executives expect the asset to be useful Depreciation is no longer a directly reimbursable expense for most hospitals. Depreciation is calculated by two common methods Straight-line method and written down value also known as WDV method. (sometimes called reducing balance method.) Let us take an example. A Company has a machine costing Rs. 1, 00,000/-. Estimated life of the asset is 5 years. With the straight-line method, Rs. 20,000/- will be charged as expense of depreciation every year in the profit and loss account and in the balance sheet, the value will be reduced by Rs. 20,000/- every year. Since retained profits go to reserves, the reduction in profits (source side, as profit belongs to the owners) is matched by a similar reduction of fixed assets (application side, as use of money). So after 5 years, the value of the assets on the balance sheet will be zero and the no additional depreciation will be charged. In written down value WDV method, a certain percentage is taken as value to be reduced, the reduced value taken as the next basis for reducing the value again. Taking the same example again asset value new is Rs. 1, 00,000/-, life is 5 years, so let's charge 20% depreciation each year. At the end of one year, asset value will be Rs. 80,000/Rs20,000/- charged as depreciation. In the second year Rs. 80,000/- the written down value
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will be taken as the base and 20% charged on this value. So at end of second year asset value will be Rs. 64,000/-, Rs. 16,000/- being charged as depreciation. This will go on, theoretically, the value will never be zero, but once the useful life is over, the balance value will be written off and asset scrapped, sold, etc. Depreciation thus follows the principal of conservatism, as it reduces the value of assets on the wear and tear, also reduces profits proportionately.

Q.3. Define & classify the Budget.

Ans.: A budget is an instrument of management used as aid in planning, programming and control of business activity. A budget may be defined as a financial and quantities statement prepared and approved prior to a defined period of time, normally for one year, of the policy to be pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and employment of capital. Past performances, characteristics of the business, objectives of the business, financing options, alternatives, and the consequences of each should be taken into account for this. This leads to plans, which are known as budgets. Thus budget has following characteristics: 1. It is a written plan of action. It is always expressed in quantitative terms and numbers, which are translated in financial terms. 2. It is used for cost control purpose and it is one of the most important overall control device employed by management. 3. A budget represents the financial requirements the financial requirements of different section of the business during a given period to achieve an estimated profit based upon a given volume of sales. 4. A budget is based upon a past statistical data and it predicts the estimated labor, sales, production and other management requirement for future, i.e. for a defined budgetary period (of time). 5. A budget can be thought of as an overall plan for the operation of the business in terms of sales production and expenditure. 6. Budgets must have the backing of the top management and participation along with commitment by all concerned to make it a success. Budgeting Budgeting is an art of budget making. Budget plays an important role in the development and use of modern cost accounting system in all types of business enterprises. A good budgeting process shows the manager what he may except in sales over the next few months. It permits the formulation of a production quota including the types and quantities of material, the number and kind of laborers, the amount of overheads and the
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fixed asset requirements and it points out financial requirements needed to accomplish the budget plans. Thus budgeting implies forecasting and preplanning for the budget period, basing upon past experience statistical data and present conditions.

Advantages of Budgeting To reiterates, budgeting is a management tool; it is a way of managing. 1. Forced planning : Budgeting Compels management to look ahead and become more effective and efficient in administering the business operations. 2. Coordinated operation : It helps to coordinate, integrate and balance the efforts of various departments in the light of the overall objective of the enterprise. 3. Performance evaluation and control : It facilitates control by providing definite expectations in the planning phase that can be used as a frame of reference for the judging the sequent performance. 4. Effective communication : It improves the quality of communication. The enterprise objectives, budget goals, plans, authority and responsibility and procedures to implement plans a clearly written and communicated through budgets to all individuals in the enterprise. 5. Optimum utilization of resources : It helps to optimize the use of the firm's resources capital and human, it aids in directing the total efforts of the firm into the most profitable channels. 6. Productivity improvement : Budgeting increases the morale and thus the productivity of the employees by seeking their meaningful participation in the formulation of plans and policies. 7. Profit mindedness : Budgeting develops an atmosphere of profit mindedness and cost consciousness. 8. Efficiency : Budgeting measures efficiency permits management selfevaluation and indicates the progress in attaining the enterprises objectives.

There are various types of Budgets .They include:

Operating Budget: It relates to the planning of the activities or operations of the enterprise, such as production, sales and purchase.

Activity Budget: It specifies the operations or functions to be performed during the next year. The program budget focuses on activities rather than person; bit exhibits the expected future in a impersonal manner.

Responsibility Budget: It specifies plans in terms of individual s responsibilities. The focus is on individuals. The basic purpose of this kind of budget is to achieve control
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by comparing the actual performance of a responsibility individual with the expected performance.

Financial Budget: Are concerned with the financial implications of the operating budgets the expected cash inflows and cash outflows, financial position and the operating results.

Cash Budget: A good management would keep cash balance at optimum level. The major objective of the cash budget therefore is to plan cash in such a way that the company always maintains sufficient cash balance to meet its needs and uses the idle cash in the most profitable manner.

Proforma Financial Statements: A financial statement constructed from projected amounts. A firm might construct a pro forma income statement based on projected revenues and costs for the following year. Likewise, a firm may wish to develop a set of pro forma statements to determine the effect of a projected stock buyback.

Capital Budget:It involves the planning to acquire worth while projects, together with the timings of the estimated cost and cash flows of each project. Capital budgets are difficult to prepare because estimates of the cash flows over a long period have to be made which involves a great degree of uncertainty.

Q.4. Discuss the relevance of Investment Decisions in the Hospital setup with the examples.
Investment Decision have the following characteristics they exchange current funds for future benefits the funds are invested in long term assets the benefits will accrue over a series of years. An investment will add to the wealth if the returns are more than the opportunity cost of the capital.

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Investment decisions need special attention because they influence the company s growth in the long run, They affect the risk of the firm, involve commitment of large funds, they are often irreversible or reversible at a large loss, they involve future which is uncertain , are thus difficult to make. Investments are made to expand existing business, for new business and for replacement/ modernization. Investment may be mutually exclusive, independent or contingent investments. Investment decisions have the following characteristics as far as hospital setup is concerned. It plays a very vital role in hospital setup too.These are the characteristics they exchange cureent funds for future benefits the funds are invested in long term assets the benefit will accrue over the series of years. Expenditure and benefit should be measured in cash.

Investment needs special attention because:       They influence company s growth in the long run They affect the risk of firm They involve commitment of large funds. They are often irreversible or reversible at large loss. They involve commitment which is uncertain, are thus difficult to make.

Investments are made to expand the existing setup, for new development of business and for replacement/modernization. They may be mutually exclusive, independent or contingent investments.

Mutually exclusive investment: Group of Capital Budget projects that compete with one another in such a way that the acceptance of one automatically excludes all others from further consideration. Analysis of competing projects using the Net Present Value (NPV) and Internal Rate of Return (IRR) methods may give decision results contradictory to each other. From a practical standpoint, the NPV method generally gives correct ranking to mutually exclusive projects.

Independent Investment: Investments an individual or firm makes that are not related to each other. That is, independent investments are intended to achieve different investment goals. One may buy independent investments individually or in groups.

Contingent Investment: An asset in which the possibility of an economic benefit depends solely upon future events that can't be controlled by the company. Due to
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the uncertainty of the future events, these assets are not placed on the balance sheet. However, they can be found in the company's financial statement notes.

Steps in the investment evaluation criteria 1. Estimation of cash flows, which is explained at the end of this chapter 2. Estimation of required rate of return, which is explained above, based on the risk involved, or on the opportunity cost, etc. This is a crucial decision as the rate of return taken can make project look acceptable or may be rejected. Preferably the rate of return taken should be the one that is realistic and is the one that justifies the risk in the project along with opportunity cost. It definitely would be much more than the risk free rate of return. 3. Using a decision rule for making a choice. Any criteria that is used to select should take into account that It considers all cash flows to determine the profitability / viability of the project It is objective in nature in selecting projects Helps in ranking projects Recognizes that larger cash flows in the beginning are better than at later stages. The techniques used in practice are of two types Using discounting techniques Net Present Value (NPV) Internal Rate of Return (IRR) Profitability Index (PI) Discounted Payback method Non Discounted Cash Flow Criteria Payback Method Accounting rate of Return (ARR) Hence, Investment plays a significant role as far as healthcare sector is concerned.

5. Elaborate the concepts of Shares, Equity & Debentures.

Ans.: Shares Two long term securities available to a company for raising capital are: shares and debentures, Shares include only ordinary shares and preferences shares. Ordinary shares provide ownership to investors. Debentures or bonds provide loan capital to the company and investors get the status of the lenders.

Ordinary shares are also known as common shares. They represent the
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ownership position in the company. The holders of ordinary share are called share holders or stock holders and are referred to as legal owners of the company. Ordinary shares are the sources of permanent capital since they do not have a maturity date. For the capital contributed by the share holders, they are entitled dividends. An ordinary share has variable income security i.e. the amount of dividend is not fixed; it is decided by company s board of directors. Being the owner of the company owners bear the risk of ownership. Features of the Ordinary share includes: Claim on the income, Claim on the assets, Right to control, Voting rights, Preemptive rights, limited liability. The capital represented by the ordinary share is called share capital or Equity capital. The following are the pros and cons of the Equity financing:  Permanent capital: It is a permanent capital and is available for use as long as company goes.  Borrowing Base: The equity capital increases the company s financial base, and thus its borrowing limit. Lenders generally lend in proportion of the company s equity capital.  Dividend Payment Discretion: A company is not legally obliged to pay dividend. In times of financial difficulties, it can reduce or suspend payment of the dividend.

Equity Equity has some disadvantages to the firm compared to other sources of finance:  Cost: Shares have higher cost at least for two reasons: Dividends are not tax deductible as are interest payments, and floatation costs on ordinary shares are higher than those of debt.  Risk: Ordinary shares are riskier from investors point of view as there is uncertainty regarding dividend and capital gains. Hence they require a relatively higher rate of return.  Earning Dilution: The issue of new ordinary shares dilutes the existing shareholders earning per share if the profits do not increase immediately in the proportion to the increase in number of ordinary shares.  Ownership Dilution: The issuance of new shares may dilute the ownership and control of the existing shareholders. While the shareholders have the pre-emptive right to obtain the proportionate ownership, they may not have funds to invest in additional shares. Public issue of equity means rising of share capital directly from the public. Debentures
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A debenture is a long-term promissory note for raising loan capital. The firm promises to pay interest and principal as stipulated. The purchasers of debentures are called debenture holders. The following are the features of Debentures:  Interest rate: The interest rate on debenture is fixed and known. It is called the contractual or coupon rate of interest. It indicates the percentage of the par value of the debenture that will be paid out annually in form of interest.  Maturity: Debentures are issued for a specific period of time. The maturity of debenture indicates the length of time until the company redeems the par value to debentures holder and terminates the debentures.  Redemption: Debentures are mostly redeemable; they are generally redeemed on maturity. Redemption of debentures can be accomplished either through a sinking funds or buy back provisions.  Sinking Funds: It is cash set aside periodically for retiring debentures. The fund is under the control of the trustee who redeems the debentures either by purchasing them in the market or calling them in an acceptable manner.  Buy-Back Provision: They enable the company to redeem debentures at a specified price before the maturity date. It may be more than the par value of the debentures. The difference is called call or Buy- Back premium.  Indenture: An indenture or debenture trusts deed is a legal agreement between the company issuing debentures and the debentures trustee who represents the debenture holders. It is the responsibility of the trustee to protect the interests of debentures holders by enduring that the company fulfills the contractual obligation.  Security: Debentures are both secured and unsecured. A secured debenture is secured by lien on company s specific assets. If company defaults, the trustee can seize the security on behalf of debenture holders.. When debentures are not protected by any security, they are known as unsecured or naked debentures.  Yield: The yield on a debenture is related to its market price; therefore, it could be different from the coupon rate of interest. There are following types of Debentures:  Non-Convertible Debentures(NCDs)  Fully Convertible Debentures(FCDs)  Partly Convertible Debentures(PCDs)
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1. Non-Convertible Debentures (NCDs): NCDs are pure debentures without a feature of conversion. They are repayable at maturity. The investor is entitled for interest and repayment of principal. 2. Fully Convertible Debentures (FCDs): FCDs are convertible into shares as per the terms of the issue with regard to price and time of conversion. The pure FCDs carry interest rates, generally less than the interest rates on NCDs since they have attraction feature of being converted into equity shares. 3. Partly Convertible Debentures (PCDs): Debentures issued by the company has two parts: a convertible part and a non-convertible part. Such debentures are known as partly convertible debentures. Investor has the advantages of both convertible and nonconvertible debentures blended into one debenture.

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