Senior care financial statements and cost reports explained

What does each financial record tell you?

Start with the question each document can answer. An income statement covers a period; a balance sheet captures a date. A cash-flow statement explains movements between dates. Supporting schedules connect the totals to underlying transactions. Reading only the seller's summary can hide those different purposes.

The SEC's foundational tutorial describes these statement functions. Its publication date is January 2014; it supplies basic definitions, not a conclusion about a particular care company's accounting. Ask for the notes and policies that go with the statements. They can explain choices hidden by the summary lines. (Source: SEC financial-statement guide)

Which entity, dates and accounting basis are included?

List the legal entities, locations, provider identifiers and services within each report. Compare that list with the assets or ownership interests being offered. A building owner, operating company and management company may keep separate books. A group report may include parts of the business that the buyer will not acquire.

Record the start and end dates. Note any period shorter than a full year. A calendar-year tax return may not match a provider's fiscal-year cost report. A recent monthly P&L may be preliminary, while a year-end version includes later journal entries. Ask who prepared each version and what changed.

Two fictional exercises test comparisons between reports. The P&L and tax-return example separates preliminary books from the later tax bridge. The revenue-growth example compares one business across two full years. Use them to identify the figures being compared before explaining why their totals differ.

Identify whether records use cash, accrual or another stated basis. Cash-basis summaries generally follow receipts and payments; accrual records associate revenue and expenses with the applicable accounting period. Ask the adviser to check how the records should treat each item, including for tax purposes. Do not label all deposits revenue or every withdrawal an expense merely because they appear on a bank statement.

Keep a simple scope note at the top of the review. It should identify exclusions, related entities and unresolved differences. A correct number can still answer the wrong question about the deal.

How should you read the income statement?

Follow revenue from the service records to billing, accounting entries and later collections. In home care, delivered hours, billed hours and paid hours answer different questions. Facility revenue can depend on occupied units, service levels and payer arrangements. Clinical billing requires its own supporting records and review.

Ask how the books record credits, refunds and disputed claims. Check amounts reduced under payer contracts too. Gross charges may differ from both recorded net revenue and the amounts likely to be collected. Do not force one format onto every care model. Ask the preparer to explain the chosen method. Test that account against the source schedules.

Review expenses with the same care. Payroll earned near period end may be paid later. Insurance, bonuses, professional fees and related-party charges can require timing or classification explanations. A stable expense percentage does not prove that all necessary costs have been recorded.

Then identify the earnings measure being discussed. The SDE, EBITDA and EBITDAR guide explains why owner costs and rent cannot be removed without defining the result. Starting earnings and each proposed change should remain visible.

What should the balance sheet help you test?

Read accounts receivable with the aging schedule by payer, later collections and credit activity. An old balance requires investigation; a recent balance can also be disputed. Separate receivables already billed from unbilled work, deposits and amounts due from related parties.

On the liability side, check unpaid payroll, vendor balances, taxes, debt and other obligations relevant to the company. Determine whether costs earned or incurred before the reporting date were recorded. A low payable balance may reflect prompt payment, a classification choice or an omitted expense; the total alone cannot decide which.

Amounts due to or from related parties need their own review. Name each party and the purpose of the balance. Check the agreement and planned treatment at closing. Do not assume an amount will be forgiven, collected or transferred because the parties share ownership.

The balance sheet also does not define the purchase agreement. The working-capital and receivables guide addresses which operating assets and liabilities may enter the deal calculation. Confirm the agreed definitions rather than importing every current account automatically.

Why are earnings and operating cash different?

A business can record revenue before cash arrives and record an expense before paying it. Noncash charges also affect earnings. These differences help explain why profit and cash from the business may not match. A gap does not, by itself, mean someone made a math error.

The SEC's cash-flow resource describes an indirect method that starts with net income, adjusts noncash items and considers changes in operating assets and liabilities. It separates operating activity from investing and financing. The resource is staff education, not a Commission rule or an endorsement of this guide's transaction framework. (Source: SEC cash-flow explanation)

For a care acquisition, investigate the cause of the difference. Slow payer collections, an unusual payroll date or deferred vendor payments have different implications. Borrowing can increase cash without improving operating earnings. Equipment purchases and loan principal can reduce cash even though neither is treated like that month's caregiver wages.

The fully depreciated equipment exercise asks what a zero on a tax schedule means. Three fictional items share that figure. Their current uses and condition records differ. Compare those records before removing an item from the inventory or assigning a value in the buyer’s plan.

Build the cash forecast from expected collections, required payments and the proposed capital structure. A seller's historical EBITDA is an input to examine, not the cash that the buyer can automatically withdraw.

What does a Medicare cost report add?

CMS explains that Medicare-certified institutional providers submit annual cost reports to their Medicare Administrative Contractor. These reports include provider characteristics, utilization, costs and charges by cost center, settlement information and financial-statement data. CMS maintains public extracts in HCRIS, its cost-report information system. (Source: CMS cost-report overview)

The hospice multiple comparison follows this scope issue into transaction research. A provider cost report, a hospice segment subtotal and a whole-company purchase price can describe different populations even when each original document is accurate.

A cost report can help a reviewer investigate the relationship among service activity, allocated costs and the books. It has its own reporting purpose. Its fields may differ from the seller's adjusted EBITDA. They may also exclude part of the parent company and say little about a buyer's forecast.

Scope varies by dataset. The HHA documentation describes freestanding agencies and places hospital-based HHA reports in the hospital database. The hospice page describes freestanding hospice data. Absence from one download therefore does not establish that a business lacks financial records or has no revenue. (Sources: HHA documentation, hospice dataset)

Nonmedical home care, assisted living and other care models need their applicable records. Do not assume that every business on the care continuum has the same Medicare cost-report filing requirements.

Which form, period and report status should you select?

Check the provider-specific instructions and actual period before opening a worksheet. The CMS release table reviewed September 6, 2026 says data were updated June 30 and released July 14. Those release dates do not make every included report a full-year 2026 observation.

The HHA page supplies its period conditions. The older SNF page explains report-status selection, while the current overview identifies the newer form too. Read them together.

Status is another dimension. Submitted, settled, reopened and amended reports are not interchangeable labels. The HHA documentation says a provider can have multiple reports within a year after a fiscal-period change or an ownership change. Preserve the period boundaries and avoid summing overlapping reports or discarding legitimate short periods.

A report's status is not proof of an audit of the earnings used to price the business today. Ask the preparer about later amendments, settlement notices and unresolved matters within the actual review scope.

How should the cost-report data connect to the books?

Retain the original provider identifier, report identifier, fiscal dates and status. In the HHA data model, the report record links to numeric and text tables. A row with a number holds one worksheet item. It does not stand for another agency. Counting those rows can give a false provider total.

Identify the worksheet, line, column, unit and population behind each selected value. Preserve original codes and use the applicable documentation to interpret them. A charge, allocated cost and payment are different measures even if each is expressed in dollars. Do not assume a field retains the same meaning across forms.

Show how the relevant trial-balance accounts tie to the chosen report lines. Explain allocations, excluded entities, timing differences and adjustments separately. If a figure cannot be traced, record the question. Do not force the totals to agree with an entry that lacks support.

Public files help frame questions. The review also needs the company's filed reports and source schedules. The public release may lag those records. Keep the downloaded version and retrieval date so another reviewer can reproduce the comparison.

What does a worked earnings reconciliation look like?

Consider an original fictional annual accrual example. Assume reported net income is $180,000 after $20,000 depreciation, $15,000 interest and $5,000 entity income-tax expense. Under this stated definition, adding those three expenses produces $220,000 EBITDA. The example assumes these expenses are already included in net income; their presence is not universal across entity types.

The review then finds $24,000 of payroll earned in that year, still unpaid and omitted from the books. Assume the evidence confirms the amount and the year it belongs to. No other adjustment includes it. Recording it reduces historical net income to $156,000 and historical EBITDA to $196,000.

The last row is a separate buyer forecast. Assume the buyer expects $30,000 of added management cost each year. No other change offsets it, and no other line includes it. It does not rewrite historical earnings. The workforce guide explains how actual duties and employment costs support that forecast.

These figures are invented, not benchmarks or an actual seller's results. A complete quality-of-earnings analysis asks broader questions than this one correction. A proposed add-back also needs evidence; review downward changes with the same care as increases.

How does the same example reconcile to cash?

Use corrected historical net income of $156,000, not EBITDA and not the buyer's forecast. Assume net operating receivables increased $60,000, operating vendor payables decreased $10,000 and the newly recorded unpaid payroll increased accrued payroll by $24,000. Assume no other noncash adjustments or operating balance changes. Depreciation remains $20,000.

The payroll correction reduces earnings and increases the unpaid liability equally. It does not itself move cash. Before correction, the simplified bridge was $180,000 plus $20,000, less $60,000 and $10,000: the same $130,000 operating cash. That equality is a useful check on the signs.

The cash available at the end is $65,000 under these assumptions, not the $196,000 historical EBITDA. Net income already reflects interest and tax. This cash example does not add them back again. A real review must account for every relevant balance change and cash category. This illustration is not a lender's debt-service calculation or a complete forecast.

What should the owner and buyer prepare next?

Create a dated packet with monthly statements, year-end entries, trial balances, bank reconciliations and relevant supporting schedules. For a provider with cost reports, include the actual filed versions and their submission or settlement correspondence. Identify the preparer and the questions still awaiting explanation.

Use a short issue log: record the amount, period, underlying account, evidence requested and likely decision affected. A delay in receipts may affect both the cash plan and the value of unpaid accounts. A missing expense may affect earnings and liabilities together. One correction should not be counted twice in the purchase analysis.

Define the financial adviser's engagement. RSM's professional service description lists earnings quality, working capital, cash flow and balance-sheet work as related financial-diligence areas. It is a selected professional baseline, not a required package or a recommendation of that firm. (Source: RSM financial diligence)

The document-preparation guide helps organize the packet; the buyer diligence checklist connects findings to decisions. Limit initial discussions to appropriate summaries. Access to detailed staff, client and care records needs controls. Define the lawful purpose and review process before sharing those records.

Common mistakes

• Comparing a parent company's annual earnings with one provider's short-period report.
• Treating deposits as current-period revenue without checking collections, loans and owner funding.
• Assuming a cost-report status certifies adjusted transaction earnings or present operations.
• Copying a worksheet code across form versions without checking its meaning and unit.
• Adding back depreciation while omitting the cash needed for equipment.
• Subtracting an unpaid expense from earnings and then forgetting its effect on the liability balance.
• Presenting future management savings or costs as verified historical results.

Summary

Match the records before comparing the numbers. Define the entity, reporting period, accounting basis and cost-report version. Reconcile earnings with unpaid balances and cash movements, then keep unresolved questions visible. Supported historical results, justified earnings adjustments and a buyer's forecast each have a role; a useful acquisition review explains how they connect without making them interchangeable.

The private-pay sale exercise applies that distinction to a fictional home-care month. Current services, old receivables, advance payments and refundable deposits each have their own row. Use the example when a seller's cash report mixes several periods or obligations into one apparent revenue total.

Use the EBITDA definition to trace the bridge from net income and the EBITDAR definition to examine an added-back rent amount. The acquisition platform guide shows why local earnings still need central costs and timed savings in a group plan. Those examples connect the records to a decision without treating forecast results as historical earnings.