Financial Aspect of Health care system assignment. Please read carefully and make sure you understand what needs to be done.
Notes - Chapter 10
Overview
Review a Balance Sheet and understand its components
Review a statement of revenue and expense and understand
Its components
Understand the basic concept of cash flows
Know what a subsidiary report is
Reporting
Because this is not a pure accounting course, the purpose of our discussions is to get a clearer understanding of the concepts of each accounting report and not the precise understanding of accounting entries. By now, you should’ve taken Accounting 101, where you would’ve covered more detailed aspects of accounting entries.
Cash Basis of Accounting vs Accrual Basis
In the cash basis of accounting, the transaction does not enter the books until cash is either received or paid out. In accrual accounting, revenue is recorded when it is earned, not when payment is received. Expenses are recorded when they are incurred and not when they are paid.
There are four basic financial statements, Balance Sheet, Statement of Revenue and Expenses (Income Statement), Statement of Fund Balance or Net Worth and the Statement of Cash Flows.
Balance Sheet
The Balance Sheet records what an organization owns, what it owes to outside vendors or employees and what the organization is worth. As previously discussed, if the organization is a not for profit, the term fund balance is used in lieu of net worth. The balance sheet balances meaning what the organization owns less what they owe equals what it is worth.
The Balance Sheet is stated at a specific point in time. It is a snapshot of the figures at a specific point in time.
Depending upon the organization, the Balance Sheet will be for a one year period and will show a comparison to the previous year. This allows the manager to see how the organizations business has changed over time.
The Balance Sheet will reflect current (short term) assets, long term assets, current liabilities, long term liabilities and Property and equipment.
These reports being reviewed are for internal purposes and therefore do not follow GAAP (Generally Accepted Accounting Principles) practices.
Statement of Revenue and Expenses
The basic formula for the report is:
Operating Revenue – Operating Expenses = Operating Income
This report, unlike the Balance Sheet, reflects a period of time and not a snapshot. Therefore, a report maybe for the period January 1, 2018 through March 31, 2018 covering a period of three months.
If revenue exceeds expenses then there is a positive result (Gain) and if expenses exceed revenue (Loss), then there is a negative result.
Statement of Changes in Fund Balance/Net Worth
The excess of revenue over expense flows back into equity or fund balance through the statement of fund balance. A simple example of this report is as follows:
Beginning Fund Balance 1/1/18 $298,000
Excess of Revenue over Expenses 115,000
Interest Income 5,000
$418,000
The beginning balance has been brought forward from previous years. The excess of revenue over expenses and Interest Income flows from the Statement of Revenue and Expenses.
If there was a loss from operations, fund balance would have decreased.
All three reports, Balance Sheet, Statement of Revenues and Expense and Statement of Fund Balance are all interlocked and flow throughout.
Statement of Cash Flows
In order to understand why the statement of cash flows is necessary, we need to revisit the concept of accrual accounting. When cash is not received, the other side of the entry is accounts receivable. When expenses are not paid, the other side of the entry is accounts payable. These accounts are on the balance sheet but have not yet been turned into cash. Recognition of depreciation is treated differently as it is a “paper expense” and not a cash event.
The Statement of Cash Flows takes the accrual basis of accounting and turns it into the cash basis through a series of reconciling adjustments.
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Subsidiary Reports
Subsidiary reports back up the statements. These reports reflect more detail such as for Operating Revenue, a subsidiary report will detail all of separate revenue accounts, i.e. Medicaid, Medicare, Private, Commercial Insurance etc. On the expense side, the subsidiary report will detail all the departmental expenses.
