For Expert_Researcher ONLY! Assessment 1-5

Accrual Basis of Accounting

"The system of accounting that recognizes revenues when earned and expenses when resources are

used. This method is used by most nongovernmental health care organizations. See also cash basis of

accounting." (Cleverly, Page 498).

Asset of an Organization

"The resources owned by the organization. It is one of the three major categories on the balance

sheet." (Cleverly, Page 498).

Asset Management

The goal of asset management and financing is to support the business operations of health care

organizations at the lowest possible cost without taking undue risks. Asset management includes cash

management, inventory management, and receivables and payables management.

Activity Based Costing (ABC)

A method to determine the costs of a service, product or customer by tracing the resources used. ABC

focuses on: 1) controlling as well as calculating costs, 2) tracing as opposed to allocating costs and 3) the

importance of indirect costs. (Cleverly, Page 497).

Balance Sheet

"One of the four major financial statements of a health care organization. It presents a summary of the

organization's assets, liabilities and net assets as of a certain date." (Cleverly, Page 498).

"(Assets=Liabilities +Owner's Equity) In nonprofit, business oriented health care organizations, the

analogous is (Assets = Liabilities + Net Assets)." (Cleverly, Page 498).

Break Even Analysis

Break-even analysis is used in financial forecasts to estimate the point at which revenues exceed the

costs of providing services, given different estimates of demand for these services. Costs of providing

services fall into two categories: fixed and variable. Break-even analysis is particularly useful in estimating

the impact of proposed managed care reimbursement rates.

Budget

Budgeting depends on the planning and forecasting payer mix, volume of service, workload demand,

resources, and capital needs. Revenue projections and budgets are developed based on expected

workloads. Budgets provide managers with information on how input resources are used and the

associated costs for staff, materials, or supplies. Financial risk and expected rates of return impact the

budgetary process. Budget depicts what the organization as a whole, and programs or departments within

the organization, expect to spend (expenses) and earn (revenue) over a set time period.

Capital Budget

Capital budgeting is the process of analyzing potential expenditures on fixed assets and deciding what

projects should be funded. The capital budgeting process provides the quantitative and qualitative

techniques to evaluate, compare, and rank multiple capital investment alternatives. The capital budgets

depict expenses to obtain, develop, operate, or maintain major pieces of equipment, such as buildings,

diagnostic equipment, and administrative systems.

Cash Budget

"The budget that projects the organization's cash inflows and outflows resulting from financing activities

such as obtaining grants or endowments, or from borrowing or paying back long term debt." (Cleverly,

Page 500).

Cash Basis of Accounting

"The system of accounting that recognizes revenues when cash is received and expenses when cash is

paid out. See also accrual basis of accounting." (Cleverly, Page 500).

Contribution Margin

"The amount remaining after subtracting variable costs from revenues. When the organization is not at

capacity, it is the "profit" the organization makes on providing each new unit that is available to cover all

other costs. Contribution margin may be determined on a total or per unit basis." (Cleverly, Page 501).

Depreciation

An estimate/measure of how much a tangible asset (such as plant or equipment) has been "used up"

during an accounting period. It is an expense that does not require any cash outflow under the accrual

basis of accounting. (Cleverly, Page 502).

Current Ratio

"The current ratio is defined as current assets divided by current liabilities, so a current ratio of 2.0

indicates that current assets are twice as large as current liabilities. Current ratio measure's a business's

liquidity-the ability to meet cash obligations as they become due." (Gapenski, 2005, Page 332).

Debt Financing

Debt financing can be acquired from commercial banks, private placements, and publicly offered bond

financing. Commercial banks provide access to capital that can be repaid over a protracted period of time.

The principal and interest of a bank loan must be repaid on a set schedule, which can put added strain on

the organization's cash flow. Institutional investors or private placement loans (that is, life and casualty

insurance companies, real estate investment trusts, and pension funds) are most often used for the

construction and long-term financing of health care facilities, combining a mortgage loan for both

construction, and permanent financing.

Debt Funding

Debt funding can be used for working capital, information systems, medical and non-medical equipment

purchases or leases, and the acquisition, construction, or remodeling of physical facilities.

DuPont Analysis

"DuPont Analysis provides an overview of a business's financial condition and helps managers and

investors understand the relationships among several ratios…ROE equals Total Margin times Total asset

turnover times Equity multiplier." (Gapenski, 2005, Page 542).

Economic Value Added (EVA)

Economic Value Added (EVA) "is an estimate of business's true economic profit for the year…EVA

represents the residual income that remains after all costs have been recognized, including the

opportunity cost of the employed equity capital…The basic formula for EVA is: EVA equals After tax

operating profit minus (Total capital times Cost of capital)." (Gapenski, 2005, Page 546).

Equity

This is the amount of financing provided by the owners and retained earnings (the amount of earnings

reinvested in the organization).

Expenses

"A measure of the resources used to generate revenue and/or provide a service. Often used

synonymously with costs." (Cleverly, Page 503).

Financial Risk

Two of the most important concepts in health care financial management are financial risk and required

rate of return. These two concepts have taken on more significance for the health care manager with the

advent and growth of managed care. Capitation, per-diem, case rates, and other types of prospective

payment methodologies represent risk to the provider organization.

Financial Statements

There are four basic types: balance sheet, income statement, statement of cash flow, and statement of

retained earnings.

Financial Statement Analysis

Several techniques are used to analyze financial performance, including financial statement analysis and

operating analysis. Financial statement analysis examines both historical data that reflect the results of

past managerial decisions and forecasted data to plan for the future. Financial statement analysis focuses

on the information in a business' financial statements, with the goal of assessing financial condition.

Fixed Costs

Fixed costs are those that are incurred regardless of how much service is provided (utilities, maintenance,

and so on).

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles – "When taken together, all the guidance issued by" the

Financial Accounting Standards Board (FASB) "and the other organizations constitute a set of guidelines

called generally accepted accounting principles (GAAP). GAAP can be thought of as a set of objectives,

conventions and principles that have evolved through the years to guide the preparation and presentation

of financial statements." (Gapenski, 2005, Page 57).

Income Statement

This statement reports the primary measure of an organization's performance (revenues less expenses)

during the accounting period established.

Inventory Management

Inventory management reduces the cost of holding inventory, receivables management impacts cash flow

and managed care contract compliance, and payables management impacts cash flow and position.

Funding for the day-to-day operations and capital investments of the health care organization is available

from a number of sources, including retained earnings, debt financing, and public debt (bond markets).

Liabilities

"The organization's legal obligations to pay its creditors. Liabilities are classified as current and

noncurrent. Liabilities are one of the three major categories on the balance sheet and are part of the

fundamental accounting equation." (Cleverly, Page 506).

Managed Care Payment Methodologies

Cost based, charge based, discounted charges, per procedure, Per case rates, Per diagnosis, Per diem,

Global, Capitation.

Managed Care Plans

Integrated Delivery Systems, Health Maintenance Organizations, Preferred Provider Organizations,

Exclusive Provider Organizations, Point of Service Plans.

Managerial Accounting

Focuses on mostly on sub-unit, for example, a department data used internally for managerial decisionmaking.

For example, managerial accounting information is used for routine budgeting processes,

allocation of managerial bonuses, and pricing decisions, all of which deal with sub-units of an organization.

Also, managerial accounting data can be compiled for special projects such as accessing alternative

modes of delivery or projecting the profitability of a particular reimbursement contract.

Market Risk

In regards to capital budgeting: "Market risk views the project from the perspective of a shareholder who

holds a well-diversified portfolio of stocks." (Gapenski, 2005, Page 462).

Market Value Added (MVA)

"Individual shareholder's wealth is actually maximized when a firm's managers maximize the difference

between the market value of the firm's stock and the amount of capital that equity investors have supplied

to the firm. The difference is called Market Value Added (MVA): MVA equals Market value of equity minus

Book value of equity." (Gapenski, 2005, Page 545-546).

Net Income or Net Earnings

Is the excess of total revenues over total expenses? If total expenses exceed total revenue, a net loss is

reported. Net income does not equal the cash generated by operations.

Operational Analysis

Operating analysis identifies those factors usually not included in the financial statement that impact the

financial condition, including patient mix, length of stay, productivity measures, and occupancy. Operating

analysis focuses on operating data with the goal of explaining financial performance. Primary responsibility

for the information in the financial statements lies with management.

Opportunity Costs

Opportunity costs are defined as the cost of pursuing one alternative versus another. Technically,

opportunity costs are not limited to the cost of investing the money, but include any other opportunity

where the organization could have spent the money, for example: other types of medical equipment,

support systems, or facilities.

Profit and Loss Statements (P&L)

A projected profit and loss (P&L) statement is a profit projection that, in a profit analysis context, uses

assumed values for volume, price, and costs" (Gapenski, 2005, Page 151).

Profitability or Proforma Analysis

Profit analysis, or pro-forma analysis, measures the impact of various volume and reimbursement

assumptions on net income. In any profit analysis, the issue of how to allocate direct and indirect overhead

costs must be addressed. Indirect costs arise from shared resources across the organization and are,

therefore, more difficult to allocate than direct costs, which are unique to an organizational unit.

Public Bond Markets

Public bond markets are also available for debt financing for both for-profit and not-for-profit health care

organizations. When used, public bonds represent a direct obligation to the health care organization that

guarantees their rate of return.

Retained Earnings

"Portion of the profits the organization keeps in house to use in support of its mission." (Cleverly, Page

511).

Revenue

"Amounts earned by the organization for the provision of a service or sale of goods." (Cleverly, Page 511).

Time Value of Money

The idea that a dollar today is worth more than a dollar in the future. (Cleverly, Page 513).

Statement of Cash Flow

Reports the inflows and outflows of cash. Cash flows from operations report the actual cash received and

paid out during the specific accounting period. The statement of cash flow is particularly useful to

managers in predicting future cash flows that may be available for payment of debt to creditors, and in the

case of the for-profit organization, payment of dividends to investors.

Statement of Retained Earnings

This statement is an important tool in the financial management of health care organizations. It represents

the accumulated earnings that can be reinvested in the organization. For for-profit organizations, this

statement represents the amount available for reinvestment after shareholder dividends have been paid.

Time Value Analysis

One of the key concepts in time-value analysis are compounding, annuity obligations, amortization, and

opportunity costs.

Trend Analysis

"A type of horizontal analysis that looks at changes in line items compared to a base year. It is calculated:

[(any subsequent year – base year)/base year] X 100." (Cleverly, Page 513).

Variable Costs

"Costs that stay the same per unit, but change directly in total with a change in activity over the relevant

range. (Total variable cost = cost per unit X Number of units of activity)." (Cleverly, Page 514).

Variance Analysis

The variance analysis indicates whether the operations are proceeding as planned, and if, when, and

where expenses need to be cut, revenues increased, or adjustments made in capital acquisition plans and

purchases. Variance analysis is a useful tool in determining the financial viability of a managed care

contract. The analysis compares the expected rate of return based on historic versus actual utilization

patterns. When the variance is negative, resulting in an overall loss to the organization, the risk of keeping

the contract may outweigh the risk of losing market share.