Non-Profit Healthcare Accounting

Breifly discuss the role of finance in the healthcare services sector.

To ensure that organizations have sufficient resources and use those resources efficiently through planning, acquisition, and management of those resources.

Briefly describe the following health services settings: Hospitals

Provide inpatient services, typically for acute conditions

Briefly describe the following health services settings: Ambulatory Care

Provides outpatient services, can include emergency departments

Briefly describe the following health services settings: Home Health Care

Care is delivered outside of traditional facilities and in the patient’s home by skilled specialists

Briefly describe the following health services settings: Long-Term Care

Includes both in- and outpatient patient care for mental health, rehabilitation, or nursing home care

Briefly describe the following health services settings: Integrated Delivery Systems

Combine and provide all services through a single entity

What are the benefits attributed to integrated delivery systems?

Benefits attributed to integrated delivery systems include better coordination, consistency, and continuity in care, easier access to patient medical records, higher patient satisfaction, easier access to resources (including specialists and technology), and easier adherence to clinical guidelines.

What are the major current concerns of healthcare managers?

cost containment, monitoring revenue growth, improving population health, and improving clinical documentation

What are the 3 primary forms of business organization?

proprietorships, partnerships, and corporations

Describe the advantages of proprietorships and partnerships

ease of formation and no corporate income tax

Describe the disadvantages of propietorships and partnerships

unlimited liability and difficulty raising capital

What are the advantages of corporations?

limited liability and ease of raising capital

What are the disadvantages of corporations?

high cost of formation and reporting as well as additional taxation for investor-owned corporations

Briefly describe the main provisions of the ACA

comprehensive insurance exchanges, higher accountability for insurance companies, higher accountability for the cost and quality of services, an individual mandate for insurance policies, and the offering of subsidies for low-income individuals.

What implications does the ACA have on Healthcare Finance?

The ACA triggered a cascade of mergers and acquisitions in an effort for hospitals and healthcare systems to improve care coordination and quality and to maintain their market share (competing for patients). This impacts finance as consolidation often leads to higher prices for services and staffing. The boosted focus on preventative healthcare and population health coupled with an expansion of insurance coverage had led to an influx of patients interacting with the healthcare system. Additional patients require additional physicians, specialists, and other resources to support demand. Healthcare finance professionals need to balance the high cost of providing care with potentially improved access to resources gained by consolidating. Finally, the ACA shifted provider reimbursement methods to focus on quality of care, impacting how financial professionals plan for, manage, monitor, and distribute payments.

Define Accrual Accounting

The recording of economic events in the periods in which the events occur, even if the associated cash receipts or payments happen in a different period

Define Cash Accounting

The recording of economic events when a cash exchange takes place

What are generally accepted accounting principles (GAAP)?

The set of guidelines that has evolved to foster the consistent preparation and presentation of financial statements

Define Assets

An item that either possesses or creates economic value for an organization

What are 3 major categories of assets?

current assets, long-term assets, accumulated depreciation

What is the statement of cash flows?

details where a business gets its cash and what happens to it

What are the three major sections of the statement of cash flows?

cash flows from operating income, cash flows from investing activities, cash flows from financing activities

What is the bottom line of the statement of cash flows, and how important is it?

net Increase (decrease) in cash and equivalents and reconciliation

Which of the following statements about finance, accounting, and financial management is most correct?

The primary role of finance is to plan for, acquire, and use resources to maximize the efficiency and value of the enterprise.

True or False: As stated in the text, the four Cs (character, capability, charisma, and courtesy) summarize the attributes needed to be a good financial manager.

False

True or False: From a financial perspective, businesses and pure charities are identical (operate in a similar fashion).

False

Which of the following individuals (or groups) are NOT stakeholders in not-for-profit corporations?

Stockholders

Which financial statement is used to show an entity's Liabilities

Balance Sheet

Income from Operations (Net Income) is the result of the difference between

Revenues and Expenses

True/False: Unlike with the balance sheet, the income statement starts a new fiscal period at 0.

True

Which of the following are NOT parts of a business’s set of financial statements?

Statement of Reconciliation

Assume Mercy Hospital uses accrual accounting. Which of the following statements is most correct?

Supplies expense is recognized when supplies are utilized in patient care

Define Accounting

The field of finance that involves the measuring and recording of events, in dollar terms, that reflect an organization's operational and financial status

Define Financial Management

The field of finance that provides the theory, concepts, and tools used by healthcare managers to make financial decisions

Define Financial Accounting

The field of accounting that focuses on the measurement and communication of the economic events and status of an entire organization

Define Annual Report

A report issued annually by an organization to its stakeholders that contains descriptive information and financial statements for the prior year

Define Revenue

Inflows of assets resulting from the exchange of goods or services with customers

Define Liability

A fixed financial obligation of an organization

Define Expense

The costs of doing business; the dollar value of resources used to provide goods or services

What is the SEC?

The federal government agency that regulates the sale of securities and the operations of securities exchanges. This agency also has overall responsibility for the format and content of financial statements

What is FASB?

A private organization whose mission is to establish and improve the standards of financial accounting and reporting for private businesses.

What is American Institute  of Certified Public Accountants (AICPA)?

The professional association of public (financial) accountants

What is Accounting Entity?

The entity (or business) for which a set of financial statements applies

What is Accounting Period?

The period (amount of time) covered by a set of financial statements (year, quarter, etc)

What is Historical Cost?

The purchase price of an asset

What is Revenue Recognition Principle

The concept that revenues must be recognized in the accounting period in which they are realizable and earned.

Define Receivable

The amount of revenues earned, but not collected by the end of an accounting period

Define Patient Service Revenue

Revenue that stems solely from the provision of patient services; in some situations, it may only reflect revenue from fee-for-service patients

Define Premium Revenue

Patient service revenue that stems from capitated patients as opposed to FFS patients

What is Depreciation?

A noncash charge against earnings on the income statement that reflects the wear and tear on a business's fixed assets (property and equipment)

What is the Annual Depreciation Expense Equation?

(initial cost-salvage value)/ useful life

Define Salvage Value

The amount if any, expected to be received when final disposition occurs at the end of an asset's useful life

What is Operating Income?

The earnings of a business directly related to core activities; for a healthcare provider, earnings are related to patient services

What is non-operating income?

The earnings of a business that are unrelated to core activities; for a healthcare provider, the most common sources are contributions and investments

What is Net Income?

The total earnings of a business, including both operating and nonoperating income

What is the statement of changes in equity?

A financial statement that reports how much of a business's income statement earnings flows to the balance sheet equity account

What is the total profit margin equation?

Net income/Total Revenue

Define total profit margin

measures the amount of total profit per dollar of total revenue

What is the operating margin equation?

Operating Income/Total Revenue

Define operating margin

measures the amount of operating profit per dollar of operating revenues and focuses on the core activities of a business

Define a current asset

An asset that is expected to be converted into cash within one accounting period

Define Net Working Captial

A liquidity measure equal to current assets minus current liabilities

Define net patient accounts receivable

The amount of money billed for services provided but not yet collected

Define Accrued Expense

A business liability that stems from the fact that some obligations, such as wages and taxes, are not paid immediately after the obligations are created

Define Debt Ratio

A debt utilization ratio that measures the proportion of debt (vs equity) financing

What is the debt ratio equation?

Total debt (liabilities)/ Total Assets

What is the difference between the income statement and

balance sheet in regard to timing?

The income statement captures income activities over a designated period, often one year, whereas the balance sheet represents one moment in time.

What is the difference between liabilities and equity?

Liabilities are fixed claims on behalf of lenders (or others) against a business’ assets while equity is a business’s ownership claim on its assets.  

What makes a liability a current liability?

A current liability is a liability that is due within one accounting period.  

What are the main types of current liabilities?

Short term debt, notes payable, accounts payable

What is the difference between long-term debt and notes payable?

Long-term debt is debt that has a maturity greater than one accounting period whereas notes payable is short-term debt that has a maturity within one accounting period.

What is the relationship between net income on the income

statement and the equity section on a balance sheet?

The relationship between net income on the income statement and the equity section on a balance sheet is that whenever the net income increases, all of the net income is reflected on the balance sheet as an increase to net assets under the equity section. Vice versa, if an organization shows a net loss on the income statement, the balance sheet would reflect the same amount of loss to net assets.

Examples of Current Assets

Cash, Accounts Recievable, Supplies

Examples of Long-Term Assets

Net property and equipment, accumulated depreciaition

Examples of current liabilities

Accounts payable, Notes Payable

What are the key principles of the GAAP?

Historical cost, Revenue Recognition, Expense Matching, Full Disclosure

What is the key GAAP Relevance principle?

Faithful representation (complete, neutral, free from error, comparability, timliness, understandability)

What is the key GAAP Assumptions principle?

Accounting Entity, Going Concern, Periodicity, and Monetary Unit

What is Going Concern?

Assets valued on their contribution to an ongoing business, not current fair market value

What is the Profit Equation?

Profit= Revenues - Expenses

What is the Net Income equation?

Excess of revenues over expenses

What is the order of an Income Statement?

Operating Revenues (Net Patient Service Revenue, Premium Revenue, Other), Net Operating Revenue, Expenses (Salaries, Supplies, Insurance, Purchased Services, Depreciation, Interest), Total expenses, Non Operating Income, Net Income, Changes in Net Assets (without donor restrictions, changes, with donor restrictions, changes, gifts, net assets at begining of year, net assets at end of year)

What is the total capital equation?

Total Capital = Total Assets (Liabilities + Equity)

What is the Accounting Equation?

Asstes= Liabilities + Equity or Equity = Assets- Liabilities

What is the correct interpretation if a debt ratio= 0.65 (or 65%)?

every dollar of asset was financed by 65 cents of debt and 35 cents of equity

Do asset accounts increase with debit or credit?

Debit

Do Expense accounts increase with debit or credit?

Debit

Do Liability accounts increase with debit or credit?

Credit

Do Equity/Net Asset accounts increase with debit or credit?

Credit

Do Revenue accounts increase with debit or credit?

Credit

 Which of the following Transactions NOT accounted for in the current period P&L

Cash collections on patient accounts receivable were $350,000 (service was provided in a prior period)

 Under accrual accounting, all revenues reported on the income statement represent cash collections.

False

Which of the following are NOT included in the 4 Financial Statements

Trial Balance

The American College of Healthcare Executives (ACHE) surveys its members annually regarding their most critical concerns. In recent years, financial concerns have headed the list of every survey.

True

Which of the following are NOT finance activities?

Facilities Management

The primary goal of not-for-profit corporations generally is expressed in a mission statement that often involves service to the community. 

True