Accounting and the Chapter

Financial Management
Process 5

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 Objectives
• Upon completion of this chapter, you will
be able to:
– Describe the levels of accounting expertise for
various sizes of healthcare facilities
– Differentiate between financial and
managerial accounting
– List the stakeholders in healthcare financing
– Identify generally accepted accounting
principles
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 Introduction
• Healthcare organization size correlates
with sophistication of accounting and
financial management
– Small practices can get by with a bookkeeper
and a part-time accountant
– Large publicly held healthcare corporations
need bookkeepers, accountants, budget
managers, outside auditors, and risk
managers

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© 2013 Delmar/Cengage Learning. All Rights Reserved.
 Financial Accounting and
Managerial Accounting
• Financial accounting: preparation of
financial documents for external use
– Reports to Medicare and Medicaid
– Reports to stockholders
– Financial statements and budgets of
governmental healthcare agencies

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© 2013 Delmar/Cengage Learning. All Rights Reserved.
 Financial Accounting and
Managerial Accounting
• Managerial accounting: preparation of
financial documents for internal use
– Budget-to-actual expense reports
– Profitability (or loss) forecasts
– Breakeven analyses for new services
• Dual-use reports
– Annual balance sheet and income statements
– Budget documents

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Stakeholders in Healthcare Finance
• Direct financial stakeholders
– Owners, partners, and stockholders
– Bondholders, lenders, and creditors
– Employees and benefactors
• Governance and regulatory stakeholders
– Governing boards
– Governments
• Customers

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 Generally Accepted Accounting
Principles
• GAAP: standards and rules for recording
financial transactions and reporting
financial information
– Codified by Financial Accounting Standards
Board
– Accepted by American Institute of Certified
Public Accountants
– Even with standards, accounting is more art
than science
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 Generally Accepted Accounting
Principles (cont’d.)
• Going concern concept
– Assumption is that medical facility will
continue in business (is a going concern)
– Asset and liability values are based on
continued operation
• Assets typically valued at cost
• Liabilities assumed to be fully payable
• If a going concern fails, its value is likely to be far
less than what is on the “books”

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 Generally Accepted Accounting
Principles (cont’d.)
• Matching
– Accrual accounting standard for businesses
• Revenues posted on date earned
– A medical service provided today gets posted as revenue
today, even when payment is not expected for weeks
• Expenses posted as resources are used
– When a pay period crosses an accounting, the expenses
must be split across the accounting periods
– Depreciation: reducing stated value of an
asset based on its age or number of uses

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 Generally Accepted Accounting
Principles (cont’d.)
• Consistency
– Accounting methods (such as depreciation
schedules) used consistently over time
• Materiality
– Errors that significantly affect the accuracy of
financial statements must be corrected
– Significance is determined by professional
accountants and auditors

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 Generally Accepted Accounting
Principles (cont’d.)
• Full disclosure
– Anything that may affect the financial
condition of the business must be disclosed in
the annual financial report
– This includes events that occur between the
end of the fiscal year and the preparation of
the annual report (subsequent events)

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 Summary
• Financial accounting generates reports
mostly for external use
• Managerial accounting generates reports
mostly for internal use
• Stakeholders in healthcare are all persons,
organizations, and governments impacted
by the healthcare facility

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 Summary (cont’d.)
• Generally Accepted Accounting Principles
are standards and rules used by
accountants and include:
– Going concern concept
– Matching
– Consistency
– Materiality
– Full disclosure

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