MAJOR MEDICAL CENTER For the Major Medical Center financial statements on the following pages, complete the following: b. Review the financial statements. Search for unusual items. What things catch your eye on the balance sheet, operating statement, and cash flow statement? Major Medical Center Statements of Financial Position December 31 2018 2017 (In Thousands) Assets Current Assets Cash and cash equivalents $ 8,065 $9,005 Assets limited as to usecompensating balance for letters of credit 1,000 Short-term investments 1,387 1,283 Receivables for patient care, net of allowance for doubtful accounts (2018$27,232; 2017$31,934) 49,719 47,614 Pledges receivable 1,814 2,205 Inventories, at average cost 1,690 2,326 Due from third-party reimbursement programs 6,539 Receivables for government grants 467 Other 2,234 3,415 Total Current Assets $ 72,448 $66,315 Assets Limited as to Use Sinking fund 14,487 13,410 Compensating balance for standby letters of credit 923 Long-term investments 1,132 618 Due from affiliates, net 3,417 3,543 Pledges receivable, net of allowance for uncollectible pledges (2018$2,218; 2017$4,453) 1,889 1,468 Property, plant, and equipment net 98,555 89,777 Deferred financing costs 1,323 Other 2,065 1,043 $196,239 $176,174 Liabilities and Net Assets Current Liabilities Current portion of long-term debt $ 11,608 $11,488 Accounts payable and accrued expenses 29,489 25,311 Accrued salaries and related liabilities 25,572 20,096 Due to third-party reimbursement programs, net 1,874 Advances on government grants 1,587 Total Current Liabilities $ 68,256 $58,769 Long-term debt, less current portion 55,539 47,709 Accrued post-retirement benefits 6,023 6,017 Other noncurrent liabilities 16,445 17,014 Total Liabilities $146,263 $129,509 Net Assets Unrestricted $ 40,582 $ 38,014 Temporarily restricted 8,262 7,519 Permanently restricted 1,132 1,132 Total Net Assets $ 49,976 $ 46,665 Total Liabilities and Net Assets $196,239 $ 176,174 See accompanying notes. Major Medical Center Statements of Operations Year ended December 31 2018 2017 (In Thousands) Operating Revenue Net patient service revenue $402,921 $369,512 Other revenue 13,356 13,850 Net assets released from restrictions 4,708 2,863 Total Operating Revenue $420,985 $386,225 Operating Expenses Salaries and wages $207,141 $196,453 Employee benefits 44,456 44,860 Supplies and expenses 137,505 117,838 Depreciation and amortization 22,541 18,856 Research 2,457 2,214 Interest 4,456 5,253 Total Operating Expenses $418,556 $385,474 Operating Income $ 2,429 $ 751 Net assets released from restrictions used for capital acquisitions 139 146 Increase in unrestricted net assets $ 2,568 $ 897 See accompanying notes. Major Medical Center Statements of Changes in Net Assets Net Assets Unrestricted Temporarily Restricted Permanently Restricted (In Thousands) Net Assets at December 31, 2016 $37,117 $3,023 $1,132 Increase in unrestricted net assets $ 897 $ $ Restricted contributions, grants, and other receipts 7,253 Investment income restricted for specific purposes 252 Net assets released from restrictions for: Operating expenses (2,863) Capital asset acquisitions (146) Change in net assets $ 897 $4,496 $ Net Assets at December 31, 2017 $38,014 $7,519 $1,132 Increase in unrestricted net assets $ 2,568 $ $ Restricted contributions, grants, and other receipts 5,421 Investment income restricted for specific purposes 169 Net assets released from restrictions for: Operating expenses (4,708) Capital asset acquisitions (139) Change in net assets $ 2,568 $ 743 $ Net Assets on December 31, 2018 $40,582 $8,262 $1,132 See accompanying notes. Major Medical Center Statements of Cash Flows Year Ended December 31 2018 2017 (In Thousands) Operating Activities Operating income $ 2,429 $ 751 Change in temporarily restricted net assets 743 4,496 $ 3,172 $ 5,247 Adjustments to reconcile change in net assets to cash provided by operations: Depreciation and amortization 22,541 18,856 Investment income earned on assets limited as to use (774) (698) Changes in operating assets and liabilities: (Increase) decrease in receivables for patient care (2,105) 7,589 (Increase) decrease in due from third-party reimbursement programs (8,413) 4,500 Increase in accounts payable and accrued expenses and accrued salaries and related liabilities 9,654 1,412 Net effect of increases and decreases in other assets and liabilities 2,286 (8,707) Cash provided by operations $ 26,361 $ 28,199 Investing Activities Acquisitions of property, plant, and equipment, net $(10,043) $(12,998) Less amounts provided by restricted funds 139 146 Increase in investments (618) (70) Cash used in investing activities $(10,522) $(12,922) Financing Activities Net payment from (to) affiliates $ 126 $ (1,773) Increase in deferred financing costs (1,323) Repayments of long-term debt (13,326) (9,510) Deposits into sinking fund, as required by mortgage loan agreement (303) Increase in compensating balances for standby letters of credit (1,923) (Increase) decrease in pledges receivable (30) (3,190) Cash used in financing activities $(16,779) $(14,473) Net (decrease) increase in cash and cash equivalents $ (940) $ 804 Cash and cash equivalents at beginning of year 9,005 8,201 Cash and cash equivalents at end of year $ 8,065 $ 9,005 See accompanying notes. Notes to Financial Statements 1. Organization and Summary of Significant Accounting Policies Organization Major Medical Center (the Medical Center) is a not-for-profit corporation. The Medical Center provides health care and related services. The accompanying financial statements do not include the accounts of the Research Foundation, a not-for-profit corporation that solicits funds and awards grants to the Medical Center for research purposes, nor for Hospital Support, Inc., which provides certain support services. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Medical Center has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Medical Center in perpetuity. When a donor restriction expires (i.e., when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statements of operations as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reflected as temporarily restricted contributions and net assets released from restrictions in the accompanying financial statements. Receivables for Patient Care Patient accounts receivable from third-party programs for which the Medical Center receives payment under reimbursement formulas or negotiated rates are stated at the estimated net amounts receivable from such payors, which are generally less than the established charges of the Medical Center. Investments Investments consist of U.S. Treasury bonds and notes, certificates of deposit, and money market funds. Investments are carried at fair value. Amounts classified as long-term investments, consisting primarily of money market funds, represent permanently restricted net assets. Investment Gains, Losses, and Income Investment income, which includes real gains and losses, earned on permanently restricted and temporarily restricted funds upon which restrictions have been placed by donors, is added to temporarily restricted funds. All other investment income is reflected in the accompanying statements of operations. Property, Plant, and Equipment Property, plant, and equipment purchased are carried at cost, and those acquired by gifts and bequests are carried at appraised or fair market value established at the date of acquisition. Capitalized leases are recorded at the fair market value at the inception of the leases. The carrying amounts of assets and the related accumulated depreciation are removed from the accounts when such assets are disposed of, and any resulting gain or loss is included in operations. Depreciation of assets used in operations is recorded on the straight-line method over the estimated useful lives of the assets. Capitalized leases are amortized over the lease term. Pledges Unconditional promises to give cash and other assets are reported at their net present value at the date the promise is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. Pledges receivable, discounted at 10 percent, are expected to be paid as follows (in thousands): Less than one year $ 1,814 One year to five years 3,145 In excess of five years 962 $ 5,921 Less allowance for uncollectible pledges receivable (2,218) $ 3,703 Assets Limited as to Use Assets classified as limited as to use represent assets whose use is restricted for specific purposes under terms of agreements. Accrued Post-Retirement Benefits The Medical Center accounts for post-retirement health care and life insurance benefits on the accrual basis of accounting. Uncompensated Care As a matter of policy, the Medical Center provides significant amounts of partially or totally uncompensated patient care. For accounting purposes, such uncompensated care is treated either as charity care or bad debt expense. The Medical Center has defined charity care for accounting and disclosure purposes as the difference between its customary charges and the sliding scale rates given to patients in need of financial assistance. Since payment of this difference is not sought, charity care allowances are not reported as revenue. Patients who do not qualify for sliding scale fees and all uninsured inpatients who do not qualify for Medicaid assistance are billed at the Medical Centers full rates. Uncollected balances for these patients are categorized as bad debts. Total uncompensated care for all patient services approximated $22 million and $20 million in 2018 and 2017, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Management believes that the amounts recorded based on estimates and assumptions are reasonable, and any differences between estimates and actual should not have a material impact on the Medical Centers financial position. Operating Income Transactions deemed by management to be ongoing, major, or central to the provision of health care services are reported as operating revenue and expenses, and are included in operating income. Operating income also includes investment income and realized gains and losses from the sale of investments. Tax Status The Medical Center is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. The Medical Center has been classified as an organization that is not a private foundation under Section 509(a)(1). Contributions received by the Medical Center qualify as tax-deductible charitable contributions. 2. Third-Party Reimbursement Programs The Medical Center has agreements with third-party payers that provide for payments to the Medical Center at amounts different from its established charges. Payment arrangements include prospectively determined rates per discharge, reimbursement of costs, discounted charges, and per diem payments. Patient service revenue is recorded at the Medical Centers established charges when patient services are performed. Adjustments for differences between established charges and payment amounts are deducted directly from receivables for patient care and patient service revenue in the year incurred. Federal and state regulations provide for certain retrospective adjustments to current and prior years payment rates based on industrywide and hospital-specific data. The Medical Center has estimated the potential impact of such retrospective adjustments based on information presently available, and adjustments are accrued on an estimated basis in the period the services are rendered and are adjusted in future periods as final settlements are determined. Management believes that amounts recorded in the accompanying financial statements will not be materially affected upon the final settlement of such retrospective adjustments. Hospitals are reimbursed for Medicare inpatient services under the national prospective payment system (PPS) and other methodologies of the Medicare program for patient services. Such Medicare payments are based on a blend of national industry and hospital-specific data. The Medicaid program pays rates determined by the state, primarily on a basis of prospectively determined rates per discharge. The Medical Center is paid by non-Medicare/Medicaid payers based on negotiated contract amounts or, if such contracts do not exist, at the Medical Centers established charges. In addition, the state has requested a waiver from the federal government that will allow it to enroll substantially all of its Medicaid participants into Medicaid managed care programs. The ultimate outcome and effect of these changes and proposals on the Medical Centers future operations cannot presently be determined. In 2018, net revenue from the Medicare and Medicaid programs accounted for 44 percent and 23 pe