Question

Goodfellow & Perkins LLP is a successful mid-tier accounting firm with a large range of clients across Texas. During 2022, Goodfellow & Perkins gained a new client, Brookwood Pines Hospital (BPH), a private, not-for-profit hospital. The fiscal year-end for BPH is June 30. Goodfellow & Perkins is performing the audit for the fiscal year-end June 30, 2023. BPH provides medically necessary care to patients, regardless of their ability to pay. Both uninsured and underinsured patients are offered discounts of up to 100% of charges based on their income as a percentage of the federal poverty-level guidelines. BPH does not pursue collection of these accounts; therefore, they are not reported in patient service revenue and accounts receivable. The cost of providing the charity care is included in operating expenses. BPH’s investments consist of mutual funds, common equities, corporate and U.S. government debt issues, state and municipal government debt issues, and trusts. A majority of the investments are the result of charitable contributions to the hospital by generous donors. Earnings from the investments are used to cover the costs of the charity care. BPH is also eligible for certain government grants to help cover the costs of the charity care. Selected financial statements and other financial information are provided below. Since BPH operates as a non-for-profit, it reports assets, liabilities, and net assets. (Note: Net assets takes the place of equity since there are no owners.)

Brookwood Pines Hospital Statement of Financial Position (in thousands) June 30, 2023 June 30, 2022 Assets Cash and cash equivalents Short-term investments Patient accounts receivable, net Current portion of pledges and grants receivable, net Current portion of insurance recoverable Inventory Other current assets Total current assets Long-term investments Property and equipment, net Prepaid pension cost Insurance recoverable, less current portion Other assets, net Total assets $ 43,077 22,725 119,380 9,208 2,364 10,740 25,792 233,286 $36,361 49,338 99,962 5.099 1.953 10.056 23,193 225.962 915,088 576,432 19,760 11,619 31,535 $1,787,720 807,321 538.981 7.248 10,723 28,463 $1,618,698 Liabilities and net assets Accounts payable Accrued salaries and benefits Grants payable, current portion Accrued expenses and other current liabilities Due to third-party payors Current accrued liabilities under self-insurance programs Current maturities of long-term debt Short-term debt Long-term debt subject to short-term refinancing agreements Total current liabilities Long-term debt, net, less current maturities Accrued liabilities under self-insurance program, less current portion Grants payable, less current portion Other liabilities Total liabilities $ 38,431 52,361 6,459 19,209 72,494 15,709 5,040 14,550 0 224,253 $ 39,547 50.754 8,459 27,380 67.687 14.965 4.928 0 53.132 266,852 220,796 82,618 13,245 42,669 583,581 179,530 82,559 16.489 48,336 593.766 (continued) June 30, 2023 June 30, 2022 Net assets: Without donor restrictions With donor restrictions Total net assets Total liabilities and net assets 1,138,140 65,999 1.204.139 $1,787,720 962,652 62.280 1,024,932 $1,618,698 Brookwood Pines Hospital Statement of Operations Year Ended June 30 (in thousands) 2023 2022 $791,572 (33,675) $706,073 (25,810) 757.897 42.727 680.263 41,975 4,541 805,165 4,407 726,645 Revenue Net patient service revenue Estimated uncollectible accounts Net patient service revenue after estimated uncollectible accounts Rental and other revenue Net assets released from donor restrictions and federal and state grants Total revenue Expenses Salaries and employee benefits Supplies Purchased services Depreciation and amortization Insurance Rent and utilities Repairs and maintenance Interest Texas hospital assessment Other Total expenses Operating income Nonoperating gains (losses) Investment return Change in fair value of certain investments Contribution of DeLaune unrestricted net assets Grants provided Other Total nonoperating gains, net $377,895 146.172 89.774 47,858 17,430 15,218 14,722 7,351 17.227 21,324 $344,360 126,633 79,391 45,630 18,132 13,935 14,563 8,874 14,081 21.151 686,750 754.971 50,194 39,895 109,212 6,254 25,951 (6,202) 0 (3.362) 1.630 113.734 64,995 (4,458) (489) 79,797 Excess of revenues over expenses $163.928 $119,692 Selected information from the cash flow statement is as follows (in thousands): 2023 2022 $63.648 Item Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities (60,394) $67,903 (75,300) 3,706 3,463

Analysis: Using BPH’s financial data, perform analytical procedures to gain an understanding of BPH. Conduct a trend analysis, common-size analysis, and ratio analysis. Based on your analysis, document in a memo your understanding of the client, potential problem areas (accounts at risk of material misstatement), and any other special concerns. (Note: Some ratios provided in the text may need to be modified for a not-for-profit organization. If necessary, use the internet for additional research about financial ratios used in the hospital industry.)

Answer 1

Answer:-

See BPH Excel spreadsheet for the trend analysis, common-size analysis, and ratios.Content in the student memos will vary. Students should recognize how hospitals are different from a manufacturer or retailer and discuss details such as the following:

• A hospital provides services rather than selling products. Therefore, inventory consists more of medical supplies that are used as part of providing a service. Inventory represents less than 1% of total assets of BPH. For a typical retailer or manufacturer, inventory can be 25-30% of total assets. Therefore, auditors will spend significantly less audit time verifying inventory for BPH as compared to audits of wholesale/retail clients.
• Long-term investments represent about 50% of total assets for BPH. Based on its magnitude alone, auditors should spend significant audit time understanding the composition of the account, the accounting principles used, and verifying the account balance. Investment returns are critical to BPH’s ability to provide charity care; therefore, the auditors should gain a thorough understanding of how the investments are accounted for and how decisions are made about selling investments to cover costs.
• Property and equipment is approximately 33% of total assets. A hospital cannot provide services without its facility and medical equipment (such as x-ray machines, surgical equipment, and hospital beds). Based on its magnitude and importance to operations, auditors should spend significant audit time verifying the account balance and additions and disposals of property and equipment. Also important is gaining an understanding of how BPH determines if equipment is impaired and how the impairment loss is determined.
• BPH does not have much debt, especially when compared with a for-profit business. BPH relies on donations to fund operations. Auditors should gain an understanding of the donation process and verify that amounts are properly categorized as unrestricted, temporarily restricted, or permanently restricted.
• Recognition of revenue and collection of receivables is an area that has a higher risk of material misstatement. Services provided by the hospital are categorized by medical codes. Improper coding leads to improper billing and improper recording of revenue and receivables. The complexity of collecting from insurance companies, Medicare, Medicaid, and individual patients also makes it challenging to estimate the allowance for doubtful accounts. The receivables turnover in days hovers around 53 days, which appears reasonable.
• The current ratio and the quick ratio are low, hovering just under 1.00. That would imply that BPH might be struggling to pay current debts as they come due. However, BPH has a large balance of long-term investments that could be liquidated as needed to pay current debts. The auditors should gain an understanding of BPH’s policy for cash management and maintaining liquidity.
• In terms of long-term solvency, BPH appears to be in good shape. The debt ratio is low (about 33%) because BPH does not carry much long-term debt.
• The investment return (statement of operations) increased 320% from the prior year, but there was only a 13% increase in the long-term investment account. Perhaps the financial markets had a “banner” year and overall stock market values increased for the year, causing the increase in investment returns. The auditors should gain an understanding regarding the large increase in the investment return.