Finance and Economics in Health Care Discussion Response

Financial accounting reports are elements in the financial management of an organization created to effectively manage the business. Because the healthcare industry is a service industry, reports are generated to financially account for the different types of service is provided.

Accrual and Cash Flow Accounting

In cash basis accounting, revenue is recorded in a company’s financial statement (books) only after cash is received, and expenses when cash is paid out. (Baker, Baker & Dworkin, 2018). Cash basis accounting is used for small businesses generating $5 million or less of sales per year. Cash receipts and expenditures are relatively random in timing, thus reported results can vary between unusually high and low profits. (Accounting Tools, 2019). In accrual accounting, revenues are recorded when earned, not when payment is received; and expenses are recorded when they are incurred. (Baker, Baker & Dworkin, 2018) or resources used. Accrual accounting is used by larger companies, and is required for tax reporting when sales exceed $5 million. Accrual accounting more efficiently match revenues and expenses in the same reporting period. It keeps tract of revenue generated and resources used as well as cash flow, matches revenues with the resources used to generate those revenues, and the financial statements provide a broader picture of the provider’s operation, so that the true profitability of an organization can be discerned (Accounting Tools, 2019; Zelman, McCue & Glick, 2009).

Accounting Tools (2019) gives an example of how the statements differ: A company sells $10,000 of supplies to a customer in March, which pays the invoice in April. Under the cash basis, the seller recognizes the sale in April, when the cash is received. Under the accrual basis, the seller recognizes the sale in March, when it issues the invoice. Another company buys $500 in supplies in May, which it pays for in June. Under the cash basis, the buyer recognizes the purchase in June, when it pays the bill. Under the accrual basis, the buyer recognizes the purchase in May, when it receives the supplier’s invoice.

Recording Daily Used Item

Getting a patient ready for an invasive procedure, like an esophagogastroduodenoscopy (EGD), requires establishing an intravenous access for sedation. This requires the use of IV fluid, IV tubing, syringe, and a starter kit. This requires obtaining each item from the hospital’s medical supplies (the department maintains an inventory of supplies based on a par level). All the items listed above are a part of hospital inventory of medical supplies used in its day to day operation. Medical supplies are considered resources owned by the hospital (assets). Cost of these supplies should be recorded in the balance sheet in the assets column as they are part of the hospital’s inventory.

Impact of Cash Flow Issues

The cash flow statement summarizes a healthcare organization’s transactions into total receipts and payments as generated over a specific period from investments and capital assets. It shows how much cash came into the organization and how much went out. Organizations use cash flow statement to forecast the ability to generate sufficient cash flows from future activities -long term planning. (Cole-Ingait, n.d.) The organization for whom I am employed receives funding from the Department of Veterans Administration and has an accrual accounting system. Accounts receivable and accounts payable impacts cash flow because funding and payments for services rendered are usually not executed in a timely manner due to budgetary constraints. Accrual basis statements are often not able to be converted into cash flow of accounting for a financial period due to late payments or non-payments. Conversely, private health care providers affiliated with the VA encounter unpredictable cash-flow cycle due to complicated governmental payment methodologies, and reimbursement issues. Some of these organizations (using accrual accounting) that have accepted veterans referred by the VA are becoming reluctant to accept new referral usually due to nonpayment or underpayment.

Cash flow issues like provider reimbursement can result in lengthy settlement process which inhibits them from reconciling cash flow statements and can contribute to cash flow uncertainties. Cash flow uncertainties can ultimately result in decreased health care services for veterans and patients in general.

References

Accounting Tools. (2019). Cash basis vs. accrual basis accounting. Retrieved from: 

Baker, J. J., Baker, R. W., & Dworkin, N. R. (2018). Health care finance: Basic tools for nonfinancial managers (5th ed.). Burlington, MA: Jones and Bartlett Learning.

Cole-Ingait, P. (n. d). Importance of a Cash Flow Statement in a Healthcare Organization. Retrieved from: .

Zelman, W., McCue, M & Glick, N. (2009). Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts and Applications (3^rd ed.) John Wiley & Sons, Inc. ProQuest Ebook Central. Accessed on June 6, 2019 from: .