Chapter 3 The Income Statement and Statement of Changes in Equity

Expense

A cost of doing business- or providing services

Materiality constraint:

Affects the presentation of the financial statements to help them be concise and manageable.

What is an Accounting period

Any period of time over which an organizations managers want to evaluate operation and financial results. Some organizations use months, quarters and years, occasionally a fiscal year (financial year) will be used.

Why is net income called "the bottom line"?

Because of it's location on the income statement and its importance

Explain the difference between cash and accrual accounting. Be sure to include a discussion of the revenue recognition and matching principles.

Cash accounting are recognized when the financial transaction occurs-the actual flow of money into and out of a business. Accrual accounting records economic events when a transaction takes place regardless of whether or not cash is exchanged. Both the revenue recognition and matching principles fall under the accrual accounting because those are the principles that require you to match expenses to the time period that they're incurred and revenues are recognized as they are earned not only when money is received.

Is financial condition more closely related to net income or to cash flow?

Cash flow

Difference between charity care and bad debt losses? How is each handled on the income statement?

Charity care is when a provider decides to provide service to a customer for free because that customer is deemed unable to pay for services. Whereas bad debt losses mean revenue from a customer who is able to pay is not received.

What is depreciation expense and what is its purpose?

Depreciation expense is the cost of a fixed asset being spread over many years, its purpose is for bookkeeping purposes so you can allocate its expense over its useful life and obtain a tax benefit for that expense.

What is GAAP?

Generally Accepted Accounting Principles, guidelines, objectives, conventions and principles

Difference between gross revenues and net revenues (remember discounts and charity care)

Gross revenues: everything you've earned before expenses, taxes, interests, charity care and discounts etc. affect that amount where net revenue is the revenue after all of those items.

Full disclosure

Helps those preparing the statements to include even more information. This is to avoid vagueness and dishonesty.

What is the purpose of statement of changes in equity? and what is it is basic format?

Indicates how much of an organization's net income will be retained in the business and hence increase the amount of equity shown on the balance sheet. Net income retained in the business, Equity (net assets)-beginning of the year, Equity (net assets) end of the year.

What stakeholders are most interested in the financial condition of a healthcare provider?

Investors which include owners and creditors or lenders.

Consistency constraint:

Involves the application of like guidelines to a single accounting entity over time. This helps the users of the financial statements

Difference between operating income and net income?

Operating income is what's remaining after your operating expenses have been accounted for whereas net income is the revenue remaining after all types of expenses have been accounted for.

Cost matching Principle

Organization's expenses are matched with the revenues to which they are related.

Difference between patient service revenue and other revenue

Patient service revenues come strictly from patient services whereas other revenues come from various sources; parking fees, the clinic's gross charge for services provided.

Monetary Unit:

Provides the common basis by which economic events are measured. In the U.S. this would be the dollar meaning all transactions and other event are expressed in dollar terms.

Revenue recognition principle:

Revenues are recognized in the period in which they are realizable and earned. When the service has occurred.

What organizations are involved in establishing GAAP?

SEC-Securities and Exchange Commission, American Institute of Certified Public Accountants-AICPA, FASB -Financial Accounting Standards Board

What is a stakeholder?

Someone who has financial interest in the organization and are concerned with its economic status

Format of Income Statement

Summarizes the operations of an organization focusing on revenues, expenses, and profitability. An income statement broken up into the main parts are as follows: revenues, expenses, operating income, non-operating income and net income.

What are some other categories of expenses?

Supplies, depreciation, and interest expense

objectivity

The financial statements need to have their data based on supporting documentation such as invoices and contracts and not random or irrelevant information.

What is the purpose of GAAP?

To guide the preparation and presentation of financial statements

Historical cost principle:

To help ensure reliable information. Requires organizations to report values of most assets based on acquisition costs rather than fair market value.

What is the goal of financial accounting?

To provide information about organizations that is useful to present and future investors along with others to understand how the business is doing in regards to financial status and performance

Conservatism constraint:

choose the approach that is least likely to overstate the businesses financial condition.

Describe: Accounting entity

helps readers to know business report topics. Investor owned: The topic needs to be pertinent to the business activity rather than personal affairs of the owners. Specifies what specific areas of business are to be included in the financial statements.

Difference between net income and cash flow?

While net income reports total profitability the cash flow shows the cash that has come in and out of the business over the year showing the company's financial situation.

What is Going concern

an indefinite life. Assets are valued on their contribution to an ongoing business and not at their current fair market value. This assumption means that financial accounting data are not exact but present logical and systemic approaches applied to complex measurement problems.