Hospital Balance Sheet, December 31, 20X2 Revenues
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the service provided). On the other hand, the receipt of cash arising from the borrowing of money from a bank is not revenue. Happy Valley Hospital pro- vides care to patients who meet certain criteria under the hospital charity care policy without charge or at amounts less than the hospital’s established rates; because the hospital does not pursue collection of amounts determined to qual- ify for charity care, the amounts are not reported as revenue. Happy Valley Hospital provided $450 in charity care during the reporting period.
Please note that the illustrative statement of operations shown in Figure 1.7a is in non-GAAP format. GAAP format—in this case, represented by the authoritative pronouncements of AICPA 1996 Audit and Accounting Guide for
Healthcare Organizations—requires that the format of the statement of opera-
tions begin with the line “Net patient services revenues,” as shown in Figure 1.7b. Note that “Gross patient services revenues” and “Less deductions from patient services revenues” are no longer presented on statements of operations distributed outside the facility; however, for teaching purposes, both are impor- tant and included. On statements distributed outside the facility, deductions from patient services revenues are reported as follows: Bad debt is reported as an oper- ating expense based on rates; charity care is reported as a note based on rates, costs, or volumes and must include the hospital’s policy for the provision of char- ity care; and contractual adjustments are not reported, though agreements with principle third parties must be reported in the notes to the financial statements.
Hospital revenues arising from patient care services generally are recorded at the value of those services as evidenced by the hospital’s full, established rates (prices or charges) for those services. This is true whether the hospital actu- ally collects its full charges, contracts to accept less than full charges from third-party payers, or collects nothing for the services provided. Most third- party payers, for example, pay less than established rates because their eco- nomic power permits them to negotiate lower rates. Hospitals also provide a considerable amount of service to indigent patients at nominal rates or on a free (charity) basis. Also, certain patients who are financially able to meet their obligations simply fail to pay the hospital for services they have received, and bad debts are recorded by the hospital.
Nevertheless, all patient care services rendered by the hospital are usu- ally recorded as revenues measured in terms of full, established rates. Figure 1.7, for example, reports $10,000 of gross patient services revenues, of which $1,000 is estimated to be uncollectible for the reasons just indicated. This produces $9,000 of net patient services revenues or, if you prefer, “col- lectible” patient services revenues. You should understand, however, that much of this $9,000 has not yet been collected: The balance sheet at Decem- ber 31, 20X2, reports $2,600 of accounts receivable!
There are two other categories of revenues in the illustrative statement of operations. “Other operating revenues” include cafeteria sales, television and
Reporting Revenues on the Statement
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parking lot fees, rentals received, tuition from educational programs, research grants, and similar items related to the hospital’s mission in some way. “Non- operating income” consists mainly of unrestricted contributions from donors and income from investments, net of nonoperating expenses and losses.
The statement of operations in Figure 1.7 presents the revenues of the hospital in condensed form. In actual practice, of course, much more detail would be required. Necessary details often are provided in supplementary schedules to accompany the summary statement of operations. The schedules supply detailed information about the revenues earned by each organizational unit (e.g., rev- enues of each nursing unit, laboratory revenues, pharmacy revenues). In addition, patient services revenues may be classified in various inpatient and outpatient cat- egories. Detailed classifications of revenue deductions, other operating revenues, and nonoperating income also are provided in these supplementary schedules.
Hospital expenses may be defined roughly as the costs of services, supplies, and other items purchased and consumed by the hospital in the provision of patient care services during a given period of time. In accordance with GAAP, expenses are measured and recognized in the period in which they are incurred or consumed in the production of hospital revenues. This may or may not be the same time period in which they are paid. When supply items are purchased for cash, for example, their costs are considered to be assets (inventory). Only when supply items are used or consumed in hospital activ- ities are their costs recognized and reported as expenses by the hospital. Like most assets, expenses generally are measured in terms of historical costs.
The operating expenses in Figure 1.7 are reported in a functional classifica- tion; that is, they appear according to the divisional organizational units of the hospital. In actual practice, these divisional expense totals usually are supported by supplementary schedules, in which details, classified by individ- ual department and type of expense, are provided. General services expenses of $1,800, for example, could be reported by department (e.g., dietary, housekeeping, plant operation) and by type of expense (e.g., salaries and wages, supplies, purchased services). Illustrations of such schedules appear at a later point in this book.
Rather than reporting expenses in a functional classification as shown in Figure 1.7, Happy Valley Hospital might report its expenses in an object- of-expenditure, or natural, classification in the manner indicated as follows:
Operating expenses:
Salaries and wages $5,080
Supplies 1,753 Purchased services 1,520 Depreciation 310 Supplementary Schedules for Summary Statements of Operations Expenses Reporting Expenses on the Statement of Operations
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Interest 206
Other 431
Total operating expenses $9,300
This natural classification of expense typically appears in the published financial statements of hospitals. In internal management reports, hospital expenses are classified primarily on a functional basis so as to associate the expenses with organizational units and individuals who are responsible for them. This procedure, known as responsibility reporting, is especially use- ful for managerial control purposes.
The 20X2 excess of revenues over expenses of Happy Valley Hospital is $330, as indicated in Figure 1.7. As noted earlier, an excess (profit) increases the net assets of the hospital. So, by adding the 20X2 excess to the net assets balance at December 31, 20X1, we obtain the hospital net assets figure appearing in the balance sheet at December 31, 20X2:
Hospital net assets, December 31, 20X1 (Figure 1.6) $4,200
Add excess for 20X2 (Figure 1.7) 330
Hospital net assets, December 31, 20X2 (Figure 1.8) $4,530
Had there not been an excess (loss) in 20X2, the loss would be deducted in this computation. Recognize, however, that this is a simplifica- tion in that factors other than excess (or excess of expenses over revenues) may at times affect the hospital net assets balance. This point is discussed fur- ther at a later point in this book.
You should now have a general understanding of two of the principal financial statements comprising the end product of accounting. With this behind you, you can move on to a study of the accounting operations that produce the financial information contained in these statements.
Questions
Q1.1. What is the basic objective and purpose of the hospital enterprise? Q1.2. Draw up a simple organization chart for a hypothetical hospital to
indicate your understanding of the basic organizational structure generally found in hospitals.
Q1.3. State briefly the function of a hospital’s governing board, medical director, and administrator.
Q1.4. Why is there a need for information about a hospital’s financial position and operating results?
Q1.5. Describe briefly some of the major characteristics of the economic environment in which today’s hospitals operate.
Effect of Excess of Revenues over Expenses on Net Assets Balance
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Q1.6. What is the primary function of hospital accounting? Q1.7. State briefly the purpose of a balance sheet.
Q1.8. Define assets. List five examples of assets that appear in hospital balance sheets.
Q1.9. Distinguish between current and noncurrent assets. Give an example of each.
Q1.10. Define liabilities. List five examples of liabilities that appear in hospital balance sheets.
Q1.11. Distinguish between current and noncurrent liabilities. Give an example of each.
Q1.12. State the accounting equation in two alternative forms.
Q1.13. What is meant by GAAP? What is the primary source of GAAP? Q1.14. What information should be provided in the heading of a
balance sheet?
Q1.15. State briefly the purpose of the statement of operations. Q1.16. Define revenues. List four examples of revenues that appear in
hospital statements of operations.
Q1.17. Define expenses. List four examples of expenses that appear in hospital statements of operations.
Q1.18. Distinguish between a functional classification of expenses and a natural classification of expenses.
Q1.19. What information should be provided in the heading of the statement of operations?
Q1.20. “In a hospital balance sheet, assets are reported at their fair market values.” Do you agree or disagree? Explain your answer. Q1.21. “In a hospital statement of operations, revenues represent cash
receipts, and expenses represent cash disbursements of the period.” Do you agree or disagree? Explain your answer.
Q1.22. What are interim financial statements?
Q1.23. In hospital accounting, when should revenues and expenses be recognized and recorded?
Q1.24. What is the accounting entity concept?
Q1.25. What are two of the major objectives of an effective system of internal control in hospitals?
Exercises
E1.1. Given the following, what are the missing dollar amounts?
Assets Liabilities Net Assets
1) $90,000 $60,000 $?
2) 80,000 ? 30,000
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E1.2. Given the following, what is the total amount of current assets?
Prepaid expenses $ 150
Long-term investments 600
Cash 260
Deferred income 110
Inventory 320
Plant assets, at cost 8,400
Accounts receivable 2,900
Accumulated depreciation 3,300
E1.3. Given the following, what is the amount of long-term (noncurrent) liabilities?
Current liabilities $ 1,500
Current assets 3,400
Plant assets, net of accumulated depreciation 5,200
Hospital net assets 4,300
Long-term investments 400
E1.4. Given the following, what is the excess of revenues over expenses for the year?
Total operating expenses $ 9,500
Gross patient services revenues 10,300
Nonoperating income 140
Deductions from patient services revenues 1,100
Other operating revenues 600
E1.5. Dippel Hospital’s December 31, 20X2, balance sheet reported hospital net assets of $8,645. Dippel’s 20X2 excess of revenues over expenses was $714.
Required: What was reported as hospital net assets in Dippel’s
balance sheet at December 31, 20X1?
Problems
P1.1. Keener Hospital provides you with the following information that relates to its financial position at September 30, 20X1:
Accrued expenses payable $ 760
Inventory 480
Accumulated depreciation 2,800
Accounts payable 420
Prepaid expenses 90
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Deferred income 15
Land, buildings, and equipment 8,800
Accounts receivable 2,450
Notes payable 150
Long-term investments 400
Bonds payable (due 20X9) 3,500
Required: Prepare, in good form, a September 30, 20X1,
balance sheet for Keener Hospital.
P1.2. Alice Hospital provides you with the following information that relates to its operating results for the year ended December 31, 20X1:
Nursing services expenses $3,900
Deductions from patient services revenues 1,200
Other professional services revenues 4,800
General services expenses 1,700
Nonoperating income 140
Fiscal and administrative services expenses 1,200
Daily patient services revenues 6,320
Other professional services expenses 2,610
Other operating revenues 450
Required: Prepare, in good form, a statement of operations for
Alice Hospital for the year ended December 31, 20X1.
P1.3. McCart Hospital provides you with the following information that relates to its financial position at August 31, 20X2, and its operating results for the year then ended:
Accounts payable $ 430
Nonoperating income 190
Accounts receivable 2,950
Deferred income 60
Long-term investments 590
Nursing services expenses 4,300
Bonds payable (due 20X9) 4,100
Daily patient services revenues 6,830
Fiscal and administrative services expenses 1,600
Cash 340
Notes payable 180
Land, buildings, and equipment 8,600
Deductions from patient services revenues 970
Prepaid expenses 70
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Other professional services revenues 4,560
Accrued expenses payable 820
Accumulated depreciation 3,200
Inventory 240
Hospital net assets, August 31, 20X1 3,660
Other operating revenues 630
General services expenses 2,100
Required: Prepare, in good form, (1) a statement of operations
for McCart Hospital for the year ended August 31, 20X2, and (2) a balance sheet for McCart Hospital at August 31, 20X2. P1.4. Clarke Hospital provides you with the following information that
relates to its financial position at October 31, 20X1, and its operating results for the month then ended:
Bonds payable (due 20X6) $2,500
Salaries and wages expenses 5,260
Prepaid expenses 40
Hospital net assets, September 30, 20X1 2,330
Daily patient services revenues 4,630
Interest expenses 120
Nonoperating income 110
Cash 170
Deferred income 20
Deductions from patient services revenues 420
Accounts payable 170
Land 250
Utilities expenses 980
Other operating revenues 380
Notes payable 200
Accounts receivable 1,930
Accumulated depreciation 1,580
Accrued expenses payable 490
Other professional services revenues 3,470
Supplies expenses 1,210
Buildings and equipment 5,000
Inventory 190
Depreciation expenses 240
Other operating expenses 70
Required: Prepare, in good form, for Clarke Hospital (1) a state-
ment of operations for the month ended October 31, 20X1, and (2) a balance sheet at October 31, 20X1.
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Note
1. See Bigalke, J. T., and D. Roach. 2005. “Corporate Responsibility: Not-for-Profits Prepare to be Held Accountable.” Healthcare Financial
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