Chapter Questions - Group Answers
Distinguish between net realizable value and replacement cost.
NET REALIZABLE VALUE ●Valuation of assets by measuring them at what you could get if you were to sell them ●Con: based on someone's subjective estimate of what the asset could be sold for. REPLACEMENT COST ●The reverse of the net realizable value ●This method considers how much it would cost to replace that asset ●Replacement cost/current cost is another example of a subjective valuation approach
What are the primary goals of financial management for not-for profit healthcare organizations?
PROFITABILITY A trade-off always exists between maximization of expected profits and the acceptable level of risk. Undertaking greater risk requires greater anticipated returns. VIABILITY A trade-off always exists between viability and profitability. Greater liquidity results in more safety, but lower profits.
Why do not-for-profit organizations use a fund accounting system?
They ensure that charitable are used in accordance to the donor's wishes. Pg. 102
Define the following: a. Asset b. Liability c. Net asset
a. Asset - anything with economic value that can help an organization provide services either directly or indirectly. Pg. 96 b. Liability -obligations an organization has to outside creditors. Pg. 98 c. Net asset -remaining balance after liabilities are subtracted from assets. Pg. 99
Why are some charges not reported as revenue for health care organizations?
○ Contractual Allowances & Charity Care - It is revenue that is not collected and or assets not claimed per the usage or loss of net profit.
●What is a third-party payment system? How does this payment system affect the financial management of healthcare organizations?
○A third-party payment system means someone other than the individual receiving the medical care is paying for the services rendered. ○Third-party payment affects the financial management of healthcare organizations because the financial accounting is charges are not the same as revenue. Further due to contractual allowances and reimbursement models the amounts paid for by third-party payment systems very based off of third parties and their negotiating leverage.
What is the accounting journal?
○An accounting journal is a detailed account of all the financial transactions of a business. Known as the book of original entry, it's the first place where transactions are recorded. The entries in an accounting journal are used to create the general ledger → the financial statements of a business.
What are the uses of profit for healthcare organizations?
-Invest in expansion of services so there is wider access to health care -Earn profits on some patients to subsidize those who are unable to bear the costs of their services -Acquire new technologies to improve healthcare quality -Have money available in case of emergency -Replace old buildings and equipment as they wear out
What are some specific examples of assets and liabilities?
Direct assets include computers, desks, printers, pencils and printing labels used by employees. Dental chairs and other medical tools for patient use are also direct assets. Indirect assets include the treatment of patients. Liabilities can include employee wages, money owed to medical suppliers and taxes. Pg. 96-98
What is an accounting entity?
It is an entity where accounting records are kept. Pg. 102 The organization for which financial data are to be collected NOT OWNERS; it looks at what a business entity owns, not individuals
Why are Generally Accepted Accounting Principles (GAAP) needed?
It serves as a standard set of technical rulings that all organizations must follow. It ensures that financial reporting is transparent and consistent. Pg. 108, Pg. 114
Describe mark-to-market asset valuation.
Mark-to-market (fair-value) asset valuation: a valuation method used to record financial assets, such as stocks and bonds, at the current value they could be sold for; similar to net realizable value but with a greater focus on objective data ●Ex: Dignity Health buys 100 shares from Company B at $10 each. If the value of the shares goes up or down, the MTM value is to be adjusted, recording losses or gains with it.
What are the advantages and disadvantages to measuring asset values based on expected future profits?
ADVANTAGE ●An asset's value is set by the future profits the organization can expect to generate because it has the asset DISADVANTAGE ●Inaccurate due to subjectivity
What are pros and cons of cash accounting? Of accrual accounting?
Answer: The cash basis of accounting is a relatively simple approach to recording revenues and expenses. It is like using a personal checkbook. Your checkbook balance helps you know exactly where you stand. Unfortunately, the approach does not necessarily allow for the best assessment of an organization's profitability for a period of time. Accountants believe that the accrual basis of accounting does a better job measuring profits for a specific period of time. The accrual method requires an organization to record revenue in the accounting period that care has been provided even if it has not collected payment in cash yet, and record the costs related to providing that care in the same period, even if it has not yet paid for the resources it consumed. Most health care providers do use the accrual basis of accounting. Answer found on page: Chapter 5, page 132-133
What is a fiscal year? Why might an organization choose a fiscal year that differs from a calendar year?
Answer: A fiscal year is the organization's year-end, in which the overall financial position and operations are determined. This occurs during what is considered a "slow point" for the healthcare organization. An organization might choose a fiscal year that differs from a calendar year due to the influence by the desire to make things as easy and inexpensive as possible. The inventory cycle is big a deal for healthcare organizations, in which inventories must all be physically counted for. A point in time when the accounting functions within the organization are slow will make for a good fiscal-year end. Answer found on page: Chapter 5, pg. 41-42
Why is the balance sheet considered a point in time statement?
Answer: At the end of the fiscal year, many tasks have to be done by both the internal accountants and the external auditor. For example, there are time-consuming questions and information demands by the CPA, tax returns must be prepared, and reports to the SEC are required for publicly held companies. Thus, the balance sheet is considered a point in time statement because when the accounting functions within the organization are slow, it makes for a good fiscal year-end. Answer found on page: Chapter 5, page 122-123
What are the key differences between cash and accrual accounting?
Answer: Cash accounting records transactions when cash is actually received for goods or services provided, or when cash is actually paid out. Accrual accounting records transactions when goods or services are provided and when resources are consumed to provide these goods or services. Answer found on page: Chapter 5, page 46-47
How are paid-in capital and retained earnings different in for-profit health care organizations?
Answer: Contributed capital, also known as paid-in capital, represents the amounts individuals have paid directly to the organization in exchange for shares of ownership, such as common or preferred stock. Retained earnings are the portion of the income that the organization has earned over the years that was not distributed to the owners in the form of dividends. Answer found on page: Chapter 5, page 125
What can a financial statement user learn from analyzing the operating statement? Will this provide all the information necessary to understand the organization's cash position?
Answer: The income statement generally shows how much profit or earnings an organization made during the past year. It is often the primary statement used for assessing the current operations of the organization. Revenues and expenses, however, do not directly measure cash flow, which is why a cash flow statement is also necessary. Answer found on page: Chapter 5, page 43-44
Explain the following Generally Accepted Accounting Principles (GAAP):
a. Going concern - it is assumed that the organization will remain in business in the foreseeable future. If the organization goes bankrupt, its resources may be sold for less than its value indicated in its financial statements. Pg. 109 b. Conservatism - sufficient attention and consideration is given to the risks taken by the organization. This usually results in asymmetric accounting where losses are anticipated more than gains. Pg. 109 c. Matching - provides the basis for depreciation where expenses are placed in the same period as revenues that caused them to be generated. Costs should be spread out into each of the years it generates revenue. Pg. 110 d. Cost - the amount paid to acquire an item or the value that was given up in exchange for it. Pg. 110 e. Objective evidence -ensures that financial reports are based on evidence that reasonable individuals can all agree on. Pg. 111 f. Materiality - the significance of the effects of a misstatement on the user of the financial statement. Pg. 112 g. Consistency - when an organization changes accounting methods, the auditor must disclose the changes on their report. A note must be included with the statements to indicate the impact of the change. Pg. 113 h. Full disclosure - If there is any other information required for fair representation of the results and financial position of an organization, the information must be disclosed in a note to the financial statements. Pg. 113
Describe the basic accounting equation. How does the double entry accounting system work?
○Assets( A) = Liabilities( L) + Net Assets(NA) ○Any event having a financial impact on the organization affects this equation because the equation summarizes the entire financial position of the organization. The Equation by definition must always be in balance: ●If the equation must remain in balance, then a change of any one number in the equation must change at least one other number. ○Double entry signifies that it is not possible to change one number in an equation without changing at least one other number. However, the two numbers that change need not be on different sides of the equation
How do healthcare organizations get paid? Do payers all pay the same rate for the same service
○Health care organizations deliver service to a patient. Which is followed by the generation of a bill, which is a formal claim on cash. Most healthcare providers have established rates for different services "charges" - "Contractual Allowance" ○Bill or formal claim for cash is either paid directly by the patient (and if the patient has insurance the patient can send the bill to there insure for reimbursement) or (if the patient has insurance) it can be submitted directly to the insurance company for payment. ○All payers do not pay the same rate of service based off of the contractual allowance or negotiated rate between service providers and third parties (To participate in Medicaid or Medicare the service provider must agree rates set by them in order to see those patients)
What were the major changes contained in the Patient Protection and Affordable Care Act of 2010?
○Shifted Medicare reimbursement from fee-for-service to Bundled Payments: viewed as a potential way to reduce costs and improve the coordination of care across providers. Under this approach, a group of physicians and a hospital make a bid to Medicare to provide care for specific types of patients, such as coronary bypass patients, in exchange for a lump-sum amount that is less than Medicare would pay in total on a fee-for-service basis for each individual element of care, such as hospitalization and separate payments to physicians. ○Encouraged the creation of Accountable Care Organizations: If the ACO can provide high-quality care at a lower total cost to Medicare than Medicare would have anticipated for the ACO's Medicare members, then Medicare shares part of the savings with the ACO. ○Insurers had to eliminate annual and lifetime coverage caps, eliminate copays for services deemed "essential" (preventative) ○Removed insurers block on consumers with preexisting conditions ○Insurance mandate (penalties) ○Creation of Health care exchanges
What is a contractual allowance?
○The difference between a provider's posted charge for service and the amount of payment agreed to by the provider and the third-party payer.
Why is the US healthcare system considered complex?
○Unlike other industries, third parties often pay health care service providers for services rendered. The patient is often caught in the middle of the maze of payment and insurance issues plaguing the current healthcare system.
Explain the primary functions of accounting.
●Accounting is a system for providing financial information ●Useful in decision-making ●Recording financial information There are four kinds of accounting: 1.Bookkeeping 2.Financial Accounting 3.Managerial Accounting 4.Taxes
Why is the GAAP concept of objective measurement paramount in understanding asset valuation?
●GAAP: approved accounting methods/practices/followed accounting rules and standards for financial reporting ●Ans/Allows investors to easily evaluate financial statements ●Minimizes the risk of erroneous financial reporting, based on its historical cost, not in the current value.
Explain several implications of IFRS on financial reporting by health care organizations.
●It strives for understandable, reliable, comparable, relevant and fair presentation of the organization's results of operations and financial position. Pg. 114 ●It has provisions for adjusting numbers for the impact of inflation during periods of hyperinflation. Pg. 114 ●More leases appear on the balance sheet as an asset and a liability than they had historically under GAAP. Pg. 115 ●It treats research costs as an expense as soon as they are incurred. It allows development costs to be treated as an asset rather than as an expense under certain circumstances. Pg. 115 ●It allows for reevaluation of some nonfinancial assets to fair value. Pg. 115 ●Compensation based on profits may be changed and affect compensation. All profit sharing plans may need to be revisited and revised. Pg. 116
Explain the primary functions of finance
●Provision of analyses, concerning the acquisition and disposition of the organization's resources ●Ensure the safety of funds ●Ensure efficient effective and profitable utilization of funds ●Ensure that finance funds don't remain idle ●Ex: Taking out a Project-Loan to purchase a Kirby Lester machine to enhance/increase the volume of the pharmacy
What are the two most crucial aspects of this accounting entity concept?
●When an entity is defined, its resources and obligations should not be commingled with those of other entities. Pg. 94 ●All financial events should be viewed from the entity's own point of view. The buyer and seller must determine whether they have a payable or receivable to keep their financial records straight. Pt. 94