Ch 3

Question 1

Balance sheet, its 3 major parts, and the formula

Answer 1

Snapshot of detailed outline of what the business OWNS, OWES, and what it’s WORTH

Assets Liabilities, Equity

Assets = Liabilities + Equity

Question 2

What is the order in which money is paid out?

Answer 2

Liabilities are paid before equity is paid out

Question 3

Define current assets, where it’s at, and some examples

Answer 3

Found on balance sheet, assets that are expected to be exchanged for cash or consumed during the operating cycle of the entity

Cash: currency and available deposited funds

Cash Equivalents: savings accounts, certificates of deposit, and other temporary marketable securities

Accounts Receivable: represent legal enforceable claims on customers for prior services or goods

Inventory/Supplies

Question 4

define assets whose use are limited, where it’s found and some examples

Answer 4

Found in balance sheet, typically cash and investments that can only be spent for specific purposes

Malpractice funds
Bond trustee

Question 5

Define property and equipment, where it’s found, and some examples

Answer 5

Found in balance sheet under assets, represent investment in tangible, permanent assets; sometimes referred to as capital or fixed assets

Land and Improvements
Buildings and Equipment
Construction in Progress
Allowance for Depreciation

Question 6

Define allowance for depreciation

Answer 6

Represents the accumulated depreciation taken on the asset to the date of the financial statement

Question 7

Where are other assets found, and some examples

Answer 7

Investments in affiliated companies
Goodwill
Debt issuance costs

Question 8

Define goodwill

Answer 8

Represents the difference between the price paid to acquire another entity and the fair market value of the acquired entity’s assets, minus any related obligations or liabilities

Question 9

Define current liabilities, where they’re found, and some examples

Answer 9

Found in balance sheet, Obligations that are expected to require payment in cash during the coming year or operating cycle

Current installments of LTD
Accounts Payable
Accrued Expenses
Construction Payable
Estimated Third Party Settlements
Deferred Revenue

Question 10

Define Current Installments of LTD

Answer 10

Represents the amount of principal that will be repaid on the indebtedness within the coming year

Question 11

Where are non current liabilities found and some examples

Answer 11

Found in balance sheet

Long term debt
Deferred revenue
Estimated malpractice costs

Question 12

Define net assets and where it is found

Answer 12

Found on balance sheet, the difference between assets and the claim to those assets by third parties or liabilities

Question 13

Can equity be negative?

Answer 13

Yes equity can be negative, it represents ownership claims against the total assets of the business. If a business closes its doors the liabilities are paid first and the equity is paid last

Question 14

What is equity listed as on the balance sheet for NFP orgs?

Answer 14

Net assets

Question 15

What is the income statement?

Answer 15

Answers the question: is the business making money?

Summarizes the operations of an org with a focus on its revenues, expenses, and profitability

Focuses on results over a specific point in time

Question 16

What are the different parts of the revenue portion of the income statement

Answer 16

Total revenue
-Net patient service revenue: the revenue from pts after deductions from gross price
-other revenue: revenue from things such as cafeteria services, parking, etc

Question 17

What are the different parts of the expenses portion of the income statement

Answer 17

Wages & Benefits
Supplies
Depreciation
Interest
Bad Debts
Other

Question 18

Define depreciation

Answer 18

A non cash expense that represents the financial value an assets loses over some period of timw

Question 19

Define interest

Answer 19

Expense paid as part of debt financing

Question 20

Define bad debts

Answer 20

The amount of charges that will not be collected from pts from whom payment was expected

Question 21

Define other income

Answer 21

Income from endowments, tax support, income on reserves, and gains and losses from property sales

Question 22

Net income

Answer 22

Operating income + nonoperating income

Can be negative, do not represent actual cash out the door

Question 23

Define the cash flow statement

Answer 23

Provides info that shows and orgs cash inflows and outflows

Reported for a specific period of time

Question 24

Inflows and outflows are reported for

Answer 24

Operating activities
Investing activities
Financing activities

Question 25

Define operating activities and some examples

Answer 25

Sources and uses of cash tied to core operations

Cash inflows: cash from pt services, interest earned
Cash outflows: cash paid to employees, payment of interest, payment to creditors, income tax

Question 26

Define investing activities and some examples

Answer 26

Cash flows from investment in fixed assets and securities used as alternatives to cash holdings

Cash inflows: sale of property/equipment/investments

Cash outflows: purchase of property/equipment/investments

Question 27

Define financing activities and some examples

Answer 27

Flows that arise from financing of assets and operations

Cash inflows: contributions, sale of stock
Cash outflows: payment of long debt financing, interest paid, repurchase of company stock, dividend payment

Question 28

Financial accounting

Answer 28

Identifying, recording, and communicating the operational results and status of an organization

Question 29

Five Components of a Set of Financial Statements are

Answer 29

Income Statement
Statement of Changes in Equity
Balance Sheet
Statement of Cash Flows
Notes

Question 30

5 building blocks of financial accounting

Answer 30

Assets: resources or things of value owned by a business that possess or create value

Liabilites: fixed financial obligations, represent claims against assets

Equity: book value of ownership portion of business

Revenues: inflows of assets

Expenses: costs incurred by business to produce revenues

Question 31

Primary goal of NFP
vs FP

Answer 31

Given by a mission statement, often in terms of service to the community

For profit managers are primarily concerned with satisfying shareholders

Question 32

SEC

Answer 32

Has legal authority to regulate the form and content of financial statements, relies on FASB, AICPA, and GAAP for implementation

Question 33

Cash, Accrual, Modified Cash Accounting

Answer 33

Cash accounting recognizes an event where a cash transaction takes place
-simple and easy
-mimics tax statements

Accrual accounting recognizes an event when a cash obligation is created
-more complicated
-provides a better picture of the true economic status of a business
-generally required by GAAP

Modified cash accounting is a blend of the two methods often used by small non GAAP businesses

Question 34

Define transaction and how they are recorded

Answer 34

A transaction is an exchange of goods or services from one individual or business to another. Once a transaction is identified, it must be recorded, or posted to an accounting which identifies a unique activity within the business. Each transaction is posted twice by a journal entry

Question 35

What is the primary means for disseminating financial data

Answer 35

The annual report. Begins with a verbal discussion of current op results and expectations for the future, followed by the financial statements

Question 36

Income statement basics

Answer 36

Is the business making money? Reports the results of operations over a period of time. Three key elements: Revenues, Expenses, Profit

Question 37

Define revenues and the different formats

Answer 37

Represent money coming in the door

Patient service revenue: represents the amount negotiated with a payer

Net Pt service revenue: the amount expected to be collected after the provision for bad debts is deducted

Discounts and allowances not reported
Charity care not reported

Question 38

Why does net operating revenue not actually represent the actual amount of cash collected in each year

Answer 38

Because of accrual accounting, some portion has not yet been collected. The uncollected portion will appear on the balance sheet in an account titled net pt accounts receivable.

Question 39

Define expenses and how they can be categorized

Answer 39

Represent the sources used to create revenues.

May be categorized by:

natural classification: salaries, supplies, research
Functional classification: inpt services, outpt services

Question 40

What is typically the largest expense category for health service orgs?

Answer 40

Salaries and benefits

Question 41

Define insurance and lease expense

Answer 41

Insurance expense represents the cost of commercial insurance purchased to protect the clinic against several risks, including property and liability risks

Lease expense reports the cost of its leases for land and buildings

Question 42

Why does depreciation expense arise

Answer 42

The expanse matching principle, expenses must be matched to the revenues with which they are associated

Question 43

Which costs are immediately reported on the income statement vs not reported

Answer 43

Operating costs such as labor and supplies are assumed to produce current revenues and hence are immediately reported on the income statement.

The costs of long lived assets are not reported on the income statement at the time the acquisition is made. The cost is first capitalized (recorded on balance sheet as an asset) then spread over the accounting life of the asset, which means the cost is shown on income statement as increments over time

Question 44

Define operating income

Answer 44

Most important element of income statement, measures economic profitability as defined by GAAP. REPRESENTS ORGANIZATIONS CORE BUSINESSS

Question 45

Define non operating income

Answer 45

Income from activities not related to the provision of patient services. Contributions, investment income, cafeteria, parking

Question 46

Define net income

Answer 46

Measures total economic profitability as defined by GAAP. In NFP it’s typically called revs over expenses or changes in net assets

In NFP, the entire amount of net income is reinvested in the business

In for profit, net income belongs to the owners

Question 47

Statement of changes in equity

Answer 47

Reconciles the income statement net income item with the balance sheet equity account. In NFP the entire net income flows to the balance sheet

In for profit, there are typically deductions to net income (often dividends) that reduce the amount that flows to balance sheet