Healthcare financial management

Healthcare financial management

Discussion post for a healthcare financial management class.

Many consider the earnings or net income to be the single most important item in the financial statements. Earnings indicate the extent to which a company has engaged in value-added activities. In for-profit organizations, they are a signal that helps direct resource allocations in capital markets. In fact, the theoretical value of a for-profit company’s stock is the present value of its future earnings. Increased earnings represent an increase in company value, while decreased earnings signal a decrease in that value.

The definition of earnings management is the “reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results.” Earnings management is not to be confused with illegal activities to manipulate financial statements and report results that do not reflect economic reality.

Given the scrutiny by policymakers questioning the justification for tax-exempt status, the literature argues that, in order to minimize exposure to investigation, nonprofit hospital administrators adjust discretionary spending and accounting accruals to manage earnings to a range just above zero, resulting in a potential bias of reported earnings. As a result, do you feel that reported financial performance embodies a measure of subjectivity that effectively shades the “real” performance of the nonprofit hospital? Justify your response.

I need also 4 responses to an exciting posts I will post them under this

these are 2 and i will post another 2 later

by y Danielle

Not-for-profit (NFP) companies do not pay income tax, as opposed to for-profit (FP) companies. In a FP business, net income belongs to the owners. In an NFP business, the net income is reinvested in the business. Net income refers to the amount of money that is actually “taken home” after deductions from gross pay. For this reason, net income is considered to be the most important item on a financial statement. As stated throughout the lectures, net income is the second measure of profitability as defined by the generally accepted accounting principles (GAAP). These financial statements are prepared under accrual basis and accounting. Income statements for many NFP businesses contain a section below the net income that reconciles net income with the balance sheet. The balance sheet unveils the company’s current financial status and contains information about the resources needed to produce income as well as how those resources were financed.

In my opinion, I do not think that reported financial performance embodies a measure of subjectivity that effectively shades the “real” performance on the NFP hospital. My reasoning for this belief is because NFPs utilize accrual accounting. Because of accrual accounting, net income does not always represent cash flow which would mean that the actual amount of cash available is generated from providing a service (patient care). While some income statements do represent cash flow, others do not. It’s important to remember only partial cash flow is represented by revenue because revenue represents services provided, but necessarily those paid for in that particular year. Thus, we can get an approximation of our cash flow data by finding the sum of net income and depreciation. In doing this we get an approximate amount of cash that has been generated by our operating activity.

by Ashlie

I personally had to take some time to think about & to research this question. I relied on a scholarly article I found to give a bit more information on this topic:

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=2ahUKEwjx29yy-InhAhWls1kKHfZiCukQFjAAegQIBRAC&url=http%3A%2F%2Firanarze.ir%2Fwp-content%2Fuploads%2F2016%2F10%2FE2456.pdf&usg=AOvVaw0TMxQtrfJyL5rPIP4pmWbw

Working for a not-for-profit (NFP), I know very well that they are tax exempt. I can understand the need for the NFP organizations to be mindful about finances so that all funds are truly shown to go back into the business and not show as a profit in order to keep their NFP status. NFPs typically utilize accrual accounting, as we learned in the lectures, which means they can budget for donations they expect to receive in the future rather than what they already have earned. I would expect that in doing this type of accounting, they are able to forecast funding and reflect that they will not earn much past zero dollars to keep that NFP status. Since with accrual accounting, net income does not reflect cash flow, NFP have the ability to make the numbers work to their benefit since a portion of what is accounted for has not yet been collected. It is interesting that in the attached article, the IRS does not penalized NFP for this action as it can merely be accounted for a, ‘tax-error’ when filing forms.

With knowing this information, I do not think it shades the actual earnings of the NFPs. Since balance sheets reflect actual cash flow, it will not impact values which are actually collected from the NFP organization. Although this does not reflect that I am necessary in agreement with it, I think that NFP organizations can practice this way since their statement of cash flows with reflect input & output of cash flow while the practice of accrual accounting is the practice of accounting which measures revenues received once they are earned rather than when the cash is actually received from the actual cash flow. I look forward to hearing everyone else’s thoughts on this!