Test 3 Flashcards
Chapters 8,9,10
Financial Accounting
The branch of accounting that provides general purpose financial statements or reports to aid many decision-making groups, internal and external, to the organization, in making a variety of decisions.
Four Financial Statements created by Financial Accounting
- Balance Sheet
- Statement of Operations (Income Statement, Statement of Revenue and Expenses)
- Statement of Cash Flows
- Statement of Changes in Net Assets (Statement of Changes in Shareholders’ Equity)
Generally Accepted Accounting Principles (GAAP)
The body of rules and requirements that shape the preparation of the four primary financial statements created by financial accountants.
Managerial Accounting
Primarily concerned with the preparation of financial information for specific purposes, usually for internal users.
Principles of Accounting: Accounting Entity
The entity for which financial information will be recorded and reported.
-May be different from legal entity
Principles of Accounting: Money Measurement
An accounting transaction must be able to be expressed in monetary terms.
-Economic resources and obligations
Economic Resources
Scarce means, limited in supply but essential to economic activity.
- Including: Supplies, buildings, equipment, money, claims to receive money, and ownership interested in other enterprises.
- aka Assets
Economic Obligations
Responsibilities to transfer economic resources or provide services to other entities in the future, usually in return for economic resources received from entities in the past through the purchase of assets, the receipt of services, or the acceptance of loans.
-aka Liabilities
Owner’s Equity
Residual interest for entities with ownership interest.
Fund Balance/Net Assets
Term used for residual interest by not-for-profit healthcare organizations.
-Used interchangeably with Net Assets
Principles of Accounting: Duality
A principle that states that the value of assets must always equal the combined value of liabilities and residual interest/net assets.
Assets = Liability+residual interest/net assets
Every transaction has an opposing transaction on each side of the equation. Balance must exist.
Principles of Accounting: Cost Valuation
The price paid to acquire items owned (assets) by the company is recorded into financial statements.
-Differs from Worth
Market Value
The price at which something (i.e. stocks & bond) could be bought or sold today on the open market.
Sunk Cost
Cost already incurred.
-Not useful in cost analyses of future projects.
Cost of Capital
The cost of debt or equity in financing the acquisition of an asset.
Principles of Accounting: Stable Monetary Unit
Historic and current dollars carry the same value in financial statements.
Cash-Basis Accounting
System of accounting that recognizes revenues when earned and expenses when resources are used.
Accrual Accounting
Transactions are recognized during the period to which they relate.
Revenue
Increases in net assets/owner’s equity resulting from the sale of goods or services.
Expense
Cost incurred to provide goods and services that reduces net assets/owner’s equity.
Excess of Revenues Over Expenses
Operating income plus other income in healthcare.
-Net income in other industries.
Drawings/Dividends
Money paid to owners.
- Drawings:Proprietorships and partnerships
- Dividends: Corporations
Fund Accounting
A system in which an entity’s assets and liabilities are segregated in the accounting records.
Temporarily Restricted Net Assets
-Funds that can be used for a specific purpose only
OR
-Funds that may be released for a specific purpose only
OR
-Funds that may be released after a given passage of time.
—Restrictions imposed by donors
Permanently Restricted Net Assets
Donated assets that have restrictions on their use that will never be removed.
Donor-Restricted Net Assets: Specific-Purpose Funds
Funds donated by individuals or organizations that are restricted for purposes other than plant replacement/expansion or endowment.
Ex. Research grants
Donor-Restricted Net Assets: Plant Replacement and Expansion Funds
Funds restricted for use in plant replacement and expansions
Donor-Restricted Net Assets: Endowment Funds
Funds contributed to be held intact for generating income.
-Income earned from this may or may not be restricted.
Conventions of Accounting: Conservatism
“Lower of cost or market” rule for valuing inventories and marketable securities.
Marketable Securities
Short-term claims that can be bought and sold through a capital market.
Ex. Treasury bills, commercial paper, certificate of deposit.
Conventions of Accounting: Materiality
Permits certain transactions to be treated out of accordance with generally accepted accounting principles.
Conventions of Accounting: Consistency
Limits the accounting alternatives that can be used.
Balance Sheet
Presents a record of an organization’s assets, liabilities, and net assets(equity) at a specific point in time.
-Financial snapshot
Statement of Operations
Details the organization’s revenues and expenses during the accounting period (typically 1 year)
-aka: Income Statement, Statement of Revenues and Expenses
Statement of Changes in Net Assets/Shareholders’ Equity
Lists how the net assets(equity) changed during the period.
Statement of Cash Flows
Describes how cash was generated and used.
Notes to the Financial Statements
Provides detail on the organization’s structure, accounting practices, and financial standing.
-Unofficial fifth Primary Statement
Current Assets
Assets that will be used or consumed within 1 year.
-Some organizations use less than one year.
Cash
Consists of coin, currency, and available deposited funds at banks.
-Also: Money orders, Certified Checks, Cashier’s Checks, Personal Checks, or Bank Drafts.
Cash Equivalents
Savings accounts, Certificates of Deposit, and other temporary marketable securities.
- Two Criterion:
- Cashing in within 1 year or during operating cycle (whichever is longer).
- Readily marketable and easily convertible to cash.
Accounts Receivable
Legally enforceable claims on customers for prior services or goods.
Four Major Categories of Accounts Receivable: Charity Allowance
The difference between established gross charge service rates and amounts actually charged to indigent patients.
Four Major Categories of Accounts Receivable: Courtesy Allowance
The difference between established rates for services and rates billed to special patients, such as employees, physicians and clergymen.
Four Major Categories of Accounts Receivable: Doubtful Account Allowance
The difference between rates billed and the amounts expected to be recovered.
Four Major Categories of Accounts Receivable: Contractual Allowance
The difference between rates billed to a third-party payer and the amount that actually will be paid by that payer.
Fixed Assets
Non-movable assets, such as buildings and equipment.
Allowance for Depreciation
The accumulated depreciation taken on the asset to the date of the financial statement.
Accumulated Depreciation
The cumulative amount of depreciation recognized on an asset since its purchase.
Book value = Purchase Price - Accumulated Depreciation
Current Liabilities
Obligations that are expected to require payment in cash during the coming year or operating cycle, whichever is longer.
Accounts Payable
The entity’s promise to pay money for goods and services received.
Accrued Liabilities
Expenses that have been incurred but not yet paid.
Ex: Accruing interest, payroll, vacation pay, tax deductions, rent, and insurance.
Current Portion (or Maturities) of Long-Term Debt
Represents the amount of principal that will be repaid on the indebtedness within the coming year.
-It does not equal the total amount of the payments that will be made during the year. ONLY PRINCIPAL
Non-current Liabilities
Obligations that will not require payment in cash for at least one year or more.
Long-Term Debt
The amount of indebtedness that is not due in the next year.
Patient Services Revenue
The amount of revenue that results from the provision of healthcare services to patient.
-Represents the residual of (gross patient revenue - allowances)
Gross Patient Revenue
Total amount the healthcare organization charges for services before discounts and allowances.
Bad Debt (Doubtful Account)
An amount owed to the organization that will not be paid.
-Expected but not collected.
Other Revenue
Operating income not reported elsewhere under revenues, gains, and other support that is generated from day-to-day operations not related to patient care.
-Ex: Educational programs, research and grants, rentals of space or equipment, sales of medical/pharmacy items to non-patients, cafeteria sales, gift shop sales, parking lot sales.
Non-operating Gains (Losses)
Results from peripheral or incidental transactions.
-Ex: unrestricted Contributions/Donations, investment of unrestricted funds, sale of property, rentals of facilities not used in facility operations.
Operating Expenses
1) Salaries and Wages
2) Employee Benefits
3) Supplies and Purchased Services
4) Advertising
5) Staff Enrichment
6) Occupancy Cost
7) Depreciation and Amortization
8) Interest
