Accounting and Financial Analysis
Please answer each question on question-and-answer format.
Why are balance sheets important to healthcare organization finance and what area of the balance sheet would you consider the most critical?
• Comparing organizational costs, which costs does nursing administration have little control over and why? Which costs would be most important if you are expanding your services and considering quality improvement measures?
• Compare and contrast for-profit and not-for-profit corporate structures based on the information available from a balance sheet and an income statement? Fundamentally, what are the differences?
• Goodwill and patents are considered what types of assets? Give detailed examples and explain.
• Compare and contrast assets which are the essential economic lifeblood of a healthcare organization stability. Give detailed examples and explain.
Accounting and Financial Analysis
Accounting and Financial Analysis
Course Name and Code
Accounting and Financial Analysis
For every organization, a balance sheet is deemed an important accounting statement. A balance sheet is an organizational financial and accounting statement that provides a basic outline of the financial position and overall performance of an organization and a guide in making future decisions (Doody, 2006). Physicians should have an intensive understanding of how to monitor organizational balance sheets to determine how capital is utilized in the organization and risk management. Healthcare organizations with stronger balance sheets have a higher possibility of exploiting future opportunities, managing organizational risks, and growing sensibly. Similar to other organizational balance sheets, balance sheets of healthcare organizations include a detailed summary of the assets, liabilities, and equity of that particular healthcare organization.
Assets refer to organizational properties and have a monetary value. They are categorized into either current or non-current resources. On the other hand, liabilities refer to claims of creditors against the assets and are categorized into current or non-current obligations. Even though the profitability of an organization is mainly focused on, profits do not always guarantee organizational solvency. Assets should equal the liabilities added to the equity of an organization at any time. Organizational assets or liabilities decrease significantly influence its cash flow. Health care organizations’ stable financial health can be maintained through a regular review of the balance sheet. Although a balance sheet is divided into several parts, cash, accounts receivable, equipment, property, and major liabilities are significant and most critical parts of a balance sheet.
Health care organizational costs entail every expense incurred to ensure the active operation of the entire organization to meet its goals. Health care organizational costs can be categorized differently depending on the expenses. The common expenses in healthcare organizations include utilities, wages, salaries, and costs of administration among other expenses. All the mentioned costs can be managed and controlled by the organization’s administration to minimize unnecessary expenses. However, the treatment cost is not easily controlled directly by the administration. This is because the cost of treatment is dependent on the choices patients have regarding their lives. The patients have the right to decide their life as well as the freedom to choose the type of treatment to receive. The patient’s choice of the kind of treatment for a health condition will in the long run influence the expense of the treatment.
It is every organization’s goal to achieve long-term and stable growth while ensuring quality products and services. Less organizations would choose to invest in strategies that would lead to this significant long-term and stable growth. Similarly, health care organizations desire to provide quality services to their patients, expand those services and achieve long-term organizational growth. For this case, the costs that would be most important when a health care organization is expanding its services and considering quality improvement measures are research costs. Research mainly aims at promoting quality care through the integration of evidence in the nursing practice (Brown, 2014). Research costs are considered the most essential in health care organizations as evidence-based care promotes quality care, patient satisfaction, and outcomes. Health care organizations that desire to improve the quality of care should therefore give much attention to research to integrate evidence into its practices (Brown, 2014).
For-profit organizations are organizations that operate with the objective of making money. These organizations employ different styles in leading and managing their operations in an attempt to optimize employee satisfaction and motivation to increase their productivity. Most of these organizations serve customers by selling either products or services. The income generated is eventually shared amongst the owners, investors in the organization, and settling expenses such as wages, and salaries among others. On the other hand, not-for-profit organizations do not operate to generate profits for the owners. Money earned or donated to these organizations is used in meeting the objectives of the organization as well as its active operation (Granof, Khumawala, & Calabrese, 2021).
The framework and setup of balance sheets are almost similar to for-profit and not-for-profit organizations. However, the balance sheets for these two organizations differ in details such as terminologies and account details. For-profit organizations have balance sheets that show the intent of the organization to gain profit for the partners. The balance sheet of the not-for-profit organizations accounts more for the acceptance and use of funds in operating programs in the organization. The common distinctions in these two organizations’ balance sheets are identified in the name, assets or equity, and other differences.
Profit and Not-profit organizations differ in the naming of the balance sheet; where not-for-profit organizations refer to it as the statement of the financial position. In terms of assets and equity, every balance sheet entails assets equal to liabilities plus owners’ equity. However, the equation is not similar to not-for-profit organizations as they do not have owners. The formula for not-for-profit organizations replaces their net assets with equity where their formula is assets less liabilities equaling to net assets. Additionally, balance sheets of for-profit organizations indicate the worthiness of the organization to the owners when they meet their liability obligations and assets sold. On the other hand, the statement of financial positions for not-for-profit organizations indicates the much nonprofit available in assets the organization has (Granof, Khumawala, & Calabrese, 2021).
Other differences in the balance sheet for for-profit and non-profit organizations include the objective of the balance sheet. According to Daystar council, the statement of financial position for non-profit organizations is purposively for sources of accountability and utilization of organizational finances instead of assets and liabilities. Most not-for-profit organizations use ‘sources of funds’ to refer to liabilities and assets as ‘use of funds.’ According to Daystar, funds received in these organization from donors accounts for funds both utilized and non-utilized in the balance sheet, where the non-utilized funds are equated to net assets.
As mentioned above, assets are resources owned and controlled by an organization with the expectation that they will generate economic benefit. Assets are further categorized into current, non-current, operating, non-operating, physical, and intangible assets. Assets classification is based on the resources’ convertibility, usage, and physical existence. Under convertibility, assets can be converted easily to cash or cash equivalents. Current and non-current assets fall under the convertibility category. Classification of assets under their usage includes operating assets that are required in the normal operation of an organization and non-operating assets which are not necessarily required in the organization’s daily operation such as vacant land. Lastly, the classification of assets under physical existence includes physical/tangible assets which have a physical existence, and intangible assets which do not exist physically, that is they cannot be touched. Other than copyrights, trademarks, permits, and trade secrets, goodwill, and Patent assets fall under intangible assets (Nichita, 2019).
Goodwill in accounting is an intangible asset that cannot be monetized directly or priced individually. Goodwill is dependent on the business operations of the organization. Also, goodwill cannot be sold or purchased or transferred separately. A company’s innovative abilities, research, development, and management experience are often regarded as goodwill whose usefulness is indefinite. In a balance sheet, goodwill is only recorded when two organizations merge. That is, on a balance sheet, goodwill is the amount paid beyond the net value of a company’s identifiable assets when bought by another company (Nichita, 2019). An organization’s reputation and customer loyalty count as goodwill and are perceived as an added advantage when settling on a final selling price. The buyer pays off goodwill as a way of compensating the seller for the efforts put in place in the business well running.
An example of two companies, A and B, are in the process of merging where company A buys company B. Company B’s book value approximates $15 million, but company A pays a total of $20 million in the purchase of company B. Essentially, company A is paying a total of $5 million goodwill for the privilege of purchasing company B. in the balance sheet, company A will have to account for the goodwill it paid in the purchase of company B. stock purchase of $ 15 million will be recorded separately from the goodwill paid of $5 million where $15 million will appear under the book value while $5 million recorded under goodwill. Eventually, in the final balance sheet, book value and goodwill will appear in a similar fashion.
A patent is a legal right to use a process or develop and sell a product for twenty years. Patents are given for a product design, the function ability, or the production process. Similar to goodwill, patent assets are intangible assets whose benefits last more than one year. In accounting, patents are treated slightly differently on balance sheets from other intangible assets. For instance, money spend to purchase a patent for machinery is recorded on the balance sheet. However, the money spent on developing the machine by the company itself is always an expense. Commonly, patents are not expensed when purchased but amortized of the useful life (Nichita, 2019).
Healthcare is a broad industry that entails various assets. They include tangible assets such as land, buildings, equipment, and inventories and intangible assets such as procedures, knowledge, personnel skills, organizational structures, and reputation. Every asset in a healthcare organization is important in its way, either in the representation of the organization’s worth, the stability of its operation, source of finance, or the production of quality services. In a healthcare organization, the most valuable assets are the professionals’ and leaders’ skills, knowledge, and experiences. They are categorized as intangible assets, and their value is gauged from internal abilities as well as established external relations constituting the intellectual capital (Hassan et al., 2015). Internal capabilities involve the knowledge and skills distributed in the professionals’ minds, and stored in organizational databases and reports. They are fixed firmly in the routines and cultures of the health care organization. External relationships forming the organization’s intellectual capital comprise stakeholder relations, partnerships, and organizational reputation in the community.
Intellectual capital is documented to have a crucial component for enhancing organizational productivity and sustained operation, especially in the healthcare industry (Hassan, et al., 2015). IC is the foundation for sustained creativity, innovation and performance of the healthcare organization. Further, intellectual capital is crucial in determining the success or failure of a health care institution hence its value should be identified, utilized, and maximized. The differences in organizational performance can be based on the variations in the intellectual capital approaches and capabilities to leverage it. For performance stability and continued growth, health care institutions should intensively, systematically, and strategically manage and optimize their intellectual capital.
Health care organizations are grouped as rich in innovation and research-intensive whose success and sustained performance mainly depend on individual’s skills, procedures, knowledge, professional experiences, and stakeholders’ services. For instance, human capital, which is under intellectual capital, is essential as it indicates knowledgeable and skilled individuals who are relied on to cater to the needs of patients (Evans, Brown, & Baker, 2015). Giving patients satisfactory care, quality services, and achieved patient outcomes is one of the measures of healthcare success and can only be achieved through optimized experience, knowledge, and skills among care professionals. Knowledge and experience as components of intellectual capital in healthcare organizations indirectly show the reputation and the good image of a healthcare organization.
Healthcare organizations depend more on the capability of assets oriented on skills and knowledge. Further, these organizations invest more in knowledge and skills management which add value to employees, interactions, and relationships. Besides human capital, structural capital is an element of IC in healthcare organizations which refers to the procedures and processes formed and preserved in the institutional systems and is used to speed knowledge flow in the organization. Structural capital includes corporate culture, process efficacy, and production technology, among others that define human capital’s support and empowerment. Structural capital offers a platform for knowledge spread and growth (Evans, Brown, & Baker, 2015). Structural capital resources contain knowledge and guidelines applied in care services for quality services and patient outcomes. Relational capital under intellectual capital entails the external knowledge of stakeholders, suppliers, and partners that operate to preserve the healthcare organization’s reputation.
Brown, C. G. (2014). The Iowa Model of Evidence-Based Practice to Promote Quality Care: An Illustrated Example in Oncology Nursing. Clinical Journal of Oncology Nursing, 18(2).
Doody, D. (2006). The balance sheet: a snapshot of your financial health: for hospital CFOs who think beyond current revenue, actively managing the balance sheet–the” forgotten financial statement”–offers a strategic opportunity. Healthcare Financial Management, 60(5), 124-126.
Evans, J. M., Brown, A., & Baker, G. R. (2015). Intellectual capital in the healthcare sector: a systematic review and critique of the literature. BMC health services research, 15(1), 1-14.
Granof, M. H., Khumawala, S. B., & Calabrese, T. D. (2021). Government and not-for-profit accounting: Concepts and practices. John Wiley & Sons.
Hassan, H., Saleh, N. M., Kamaluddin, A., & Hamzah, N. (2015, November). The Role of Leadership on Intellectual Capital as Strategy Towards Hospitals’ Performance. In International Conference on Intellectual Capital and Knowledge Management and Organisational Learning (p. 363). Academic Conferences International Limited.
Nichita, M. E. (2019). Intangible assets–insights from a literature review. Journal of Accounting and Management Information Systems, 18(2), 224-261.