Qais Alefan

B.Pharm, R.Ph., M.Pharm, PhD

Accounting is 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 provides the framework for critical decisionmaking processes essential for the organization success Accounting is the dynamic process which determine and report how corporations and individuals finance their activities and use their money

A major use of accounting is to track the flow of money (cash or credit) between financing and investing activities

Understanding financial reports is essential to understanding the flow of money

If your goal is to operate a taxicab, you need to obtain a car. The car is an asset
Assets are things that a business owns & used to generate income Obtaining the money needed to acquire an asset requires financing Financing may come from a combination of personal savings, gifts, a bank loan, or even money borrowed from friends and relatives These sources of financing can be further classified as liabilities (money owed to others) and owners equity (owners own funds)

If you paid $25,000 for the car, the value of your asset is recorded as $25,000 Now lets say that you financed this asset by putting up $10,000 of your own money and getting a $15,000 from your bank

In accounting language, this investment in the asset ($25,000 for the car) is financed by owners equity ($10,000) and a liability ($15,000)
This brings us to the most important rule in accounting, often referred to as the accounting equation: Assets = owners equity + liabilities

Accounting principles are essential tools that can be applied in all areas of pharmacy practice This is so because any pharmacy engages in three fundamental activities:
Obtaining financing Making investments Conducting a profitable operation

To start a business, one needs to acquire assets Financing activities to acquire assets involve obtaining funds from owners and creditors When owners fund the activities of a corporation, they become shareholders Shareholders have a claim on the companys assets, and their investments in the company are rewarded by either:
regular distributions from the company to the owners (also known as dividends) an increase in the value of companys total assets owing to profitable operations

Creditors provide funds to the company but do not receive dividends They require the company to repay the funds with interest over a period of time

The types of investments a company makes depend on the type of business it is conducting 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

The operating activities of pharmacy settings include:

Purchasing distribution (i.e., prescription-filling activities) clinical activities administration

In many pharmacies, 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

There are three types of financial statements that are essential to the operations of any organization The fiscal year is a unit of time -a year- that businesses use to record their financial interactions A fiscal year can start on January 1 and end on December 31, or on other date and end 1 year later The three financial reports that are essential to the operation of any organization are
the balance sheet the income statement the statement of cash flows

Provides a snapshot of an organizations assets, liabilities, and shareholder equity at any particular point in time Organizations generally prepare a balance sheet at the end of a fiscal year, or at any point in time The balance sheets total assets must equal the total liabilities plus shareholders equity at all times

Provides information about money coming into an organization (income) and money necessary to obtain that income (expenses) The difference between income and expenses is referred to as net income, net profit, or earnings Tells what happens to an organization over a period of time

Records the inflows and outflows of cash throughout the fiscal year These recorded values generally fall into three categories: operating, investing, and financing

The last line in the statement of cash flows, indicating the amount of cash available at the end of a fiscal year, is always the same as the amount of cash recorded on the balance sheet for the beginning of the following fiscal year

Examine an organizations financial performance & success Net income/average total assets, provide useful information on the profitability Data are taken from the balance sheet and income statement for calculating most ratios

Measure the overall financial success of a company

The most commonly used are the gross profit margin and the net profit margin
Gross profit margin = (sales - cost of goods sold) total sales

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

Net profit margin = net income (after taxes) total sales Indicates the fraction of net profit that is generated for every dollar of sales Return on assets (ROA) = net income average total assets Provides information on the companys ability to generate profits using the companys assets

Effective use of assets results in a high ROA ratio

Return on equity (ROE) = net income average owners 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 are interested in maximizing their profits

Assess the businesss ability to meet its short-term financial obligations Current ratio = current assets current liabilities A high current ratio means fewer risks in meeting financial obligations

An alternative ratio is the quick ratio (known as the acid test)

Quick assets: assets that are easily converted to cash Provides a better picture of a companys liquidity and its ability to meet its financial obligations Quick ratio = (current assets - inventories - prepaid expenses) current liabilities

Measure the efficiency with which an organization uses its assets Inventory turnover ratio = cost of goods sold average inventory Measures how quickly an organizations inventories are sold The data for this ratio come from two different financial statements Cost of goods sold (COGS) is found on the income statement, and the average inventory comes from the balance sheet Remember that one can achieve a high inventory ratio by keeping a very small inventory

Receivables turnover ratio = credit sales average accounts receivable Measures how quickly receivables (money owed to the organization by others) are turned into cash If you divide the receivable turnover ratio by 365, you will have a ratio known as the average collection period The average collection period indicates the number of days (on average) that credit sales remain in accounts receivable before they are collected

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 easier task understanding many of the factors that affect their success