Chapter 11

Which is typically used and why?

Accrual Accounting because of the basis for reporting. Earned revenue is recongnized in financial statements when a service has been provided, that creates an expectation of payment, rather than when the payment is actually received.

Compare and contrast Cost Accounting and Accrual Accounting.

Cash Accounting: economic events are recognized when a financial transition occurs. The receipt of cash, not the provision of the service and the resulting obligation to pay. Accrual Accounting: the economic event that creates that financial transaction, rather than the transaction itself, is the basis for reporting. This concept implies that revenue earned does not necessarily correspond to the receipt of cash.

Compare and Contrast Operating and Non-Operating Income and give examples of each.

Operating Income: measures profitability of a healthcare organizations core activities - the provision of patient services and those activities that are directly related. It eliminates any income resulting from non-patient service related sources, such as contributions and securities investments. (Total revenues minus expenses) Ex: Park Ridge reported $140,000 of operating income in 2012, which means that the provision of home health care services and directly related activities generated a profit of $140,000. Non-Operating Income: The income of a healthcare provider that is unrelated to the provision of patient services. Ex: Income from securities investments and Income from Charitable Contributions (for not-for-profit businesses)

What are the two major categories that comprise the Income Statement?

Revenues and Expenses

Examples of items in each of the major categories found on an Income Statement.

Revenues: patient service revenues, provision for bad debts, net patient service revenue, other operating revenue, total revenue. Expenses: salaries and benifits, supplies and drugs, insurance, depreciation, interest, total expenses. Operating Income Nonoperating Income: contributions, investment income, total nonoperating income Net income (excess of revenues over expenses)

Discuss how the information on the Income Statement is used by an organization.

The income statement summarizes the operations of an organization with a focus on its revenues, expenses, and profitablity. It reports the results of operations of a business over some period of time - often one year. The difference between revenues and expenses. Healthcare businesses create income statements that report 2 different types of profitability - 1. profits that stem solely from patient service activities (operating income) and 2. profits from all activities (net income).