FMW6A

1. Does the difficulty in determining the current value of an asset create a problem in determining the depreciation expense that should be charged for a year? Explain your answer.

2. Why would public service organizations need to measure income?.

3. What are the problems with the objective evidence and cost conventions, and how can they be overcome?

4. Is the information on the balance sheet, activity statement, and cash flow statement independent of one another or connected? Explain your answer.

The response to each question should be must be at least 200 words in length in APA format.

 References:

Financial Management for Public Health and Not-for-Profit Organizations (4th edition)

Assignment reading attached!

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4. Describe the financial approach to strategic healthcare planning, considering how managers can
participate most effectively in this process.
4.1 Explain the purpose of the activity statement and statement of cash flows.
4.2 Discuss the process of recording financial information and generating a balance sheet.
4.3 Discuss various asset categories, including cash, marketable securities, accounts

receivable, inventory, prepaid expenses, fixed assets, and sinking funds.

Reading Assignment

Chapter 10:
Taking Stock of Where You Are: The

Balance Sheet

Chapter 11:
Reporting the Results of Operations: The Activity and Cash Flow Statements

Unit Lesson

In Unit VI, you will discover that financial reports are prepared by organizations monthly, quarterly, and
annually, and that these reports are essential for determining the financial health of a healthcare organization.
In order to function effectively in healthcare management, you need a very thorough understanding of these
reports and what they reflect about your department and your medical facility overall. A good portion of each
healthcare board of directors meeting is focused on reviewing and interpreting these reports.

Financial reports help managers understand the current financial situation of the organization and also the
financial results of its operation. They provide information not only for management of the organization, but
also for outsiders—for people who take interest in the stability of the organization as it strives to fulfill its
mission of patient care. Just a few of these parties include auditors, local government officials, the state
department of health, and various accrediting agencies.

Preparation of the financial reports which will be examined by individuals external to the organization is
referred to as financial accounting. Financial accounting employs a process of recording financial
transactions, summarizing all of the information contained in the transactions, and then reporting the
information in a set of standardized financial statements.

Balance Sheet

The statement of financial position (commonly referred to as the balance sheet) is the first of the financial
statements. You need a solid understanding of the balance sheet. A balance sheet reports the financial
position of the organization at a moment in time—often the end of a month or end of the fiscal year. For any
specific entity, this financial document provides a highly summarized view of its financial position at any one
point in time.

Financial statements are derived from information contained in and changes to the fundamental equation of
accounting. That equation states that the assets of any entity equal the liabilities plus the net worth of the
entity. All of financial accounting is built around that fundamental equation. In addition, many organizations
follow a set of rules or conventions that are referred to a Generally Accepted Accounting Principles (GAAP).
These GAAP—such as the entity, monetary denominator, objective evidence, conservatism, going concern,
and materiality principles—help to the provide structure that makes financial statements of different

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organizations understandable and comparable. It allows us to compare apples and apples, not apples and
pears, when we benchmark financial statements of medical facilities.

Statement of Changes in Equity

Balance sheets provide their readers with information about a variety of different types of assets and liabilities
of the entry. Some of the asset categories explored in this unit are cash, marketable securities, accounts
receivable, inventory, prepaid expenses, and fixed assets. A variety of liability categories are also discussed,
including both short-term payables and long-term debt. The residual value of the entity when liabilities are
subtracted from assets represents the ownership or equity value of the entity. This may be called net worth,
owner’s equity, net assets, fund balance, or a variety of other names that convey the equity concept, as
appropriate for the specific type of entry.

Activity Statement

Unit VI goes on to discuss reporting the results of operations. This is achieved by generating an activity
statement (also known as income statement) and statement of cash flows. Unlike the balance sheet, these
statements report on what has happened over a period of time, rather than just disclosing the financial
position of the organization at one specific point in time. The activity statement compares the entity’s
revenues and other support with its expenses for a period of time, such as a fiscal year.

The activity statement, probably more than any other document which reaches the board of directors, gets
intense scrutiny. It is the activity statement which shows us whether the organization has black ink for the
period under consideration, meaning that it generated a profit, or whether it generated red ink—showing a
loss.

Cash Flow Statement

The cash flow statement is also very important; it looks at where the organization obtained its cash and where
it spent cash during a particular period of time, a month, a quarter, or a year. The focus is not only on how
much cash came and went, but also on the sources and uses of cash. When we consider all four financial
statements together, we get a clear picture of when the healthcare organization is financially, where it has
been over recent periods, and where it is headed. Together, these statements provide the user with a sense
of how well the organization has done over the period of time covered by the statements. Importantly, these
statements also tell us a great deal about what the organization can realistically accomplish over future
periods.

 Can we afford to add staffing to the organization?

 Can we afford to advance our technology at this time, perhaps update equipment in crucial areas like
radiology, laboratory, respiratory therapy, or intensive care?

One thing that you need to truly understand is that there was a day in American healthcare when the financial
statements were largely left to the CFO, CEO, and accounting staff. Those days are gone. Managers at all
levels are expected to be able to work with financial statements, participate in their creation, and interpret
them as tools for managing their departments. American healthcare today requires managers who really
understand what is going on with their departments’ financial, and adapt accordingly on a month-to-month
basis. The department director may be a nurse first and foremost, but he or she will very likely need a Master
in Business Administration (MBA) or Master in Healthcare Administration (MHA) in order to do a great job of
leading his or her department. That is why so many clinical managers now find themselves going back to
school online, in courses just like this one, to increase their skills in financial management and analysis.

Conclusion

By the end of this unit, you will have a much better understanding of financial statements. You will be able to
read the:

 balance sheet, also known as statement of financial position;

 activity statement, also known as the income statement or profit and loss statement;

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 cash flow statement, broken down into operating activities, investing activities, and financing
activities; and

 statement of changes in equity, also known as the statement of retained earnings.

As mentioned in previous unit lessons, a key aspect of healthcare finance today, from the department director
perspective, is being able to speak the language of business. Unit VI is very instrumental for you in terms of
sharpening your understanding of this language—the language of healthcare finance!