Budgeting and Accounting Overview
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| Question | Response | Specific Example
(If the question asks for multiple responses, provide an example for each response.) |
| Example: What are the 3 types of business organizations? | The 3 types of business organizations are sole proprietor, partnerships (LLC), and corporations (C-corp/S-corp). | A sole proprietor would be a self-owned business such as an Etsy shop or a lawn maintenance or cleaning service. An example of an LLC would be an accounting or law firm. An example of a corporation would be a retail store such as Walmart. |
| How is financial information used to operate a healthcare organization on a day-to-day basis? | Financial information is used in healthcare organizations to budget, plan, track revenue sources, manage expenses, and maintain financial stability. It enables decision-making, cost control, resource allocation, and strategic management, ensuring effective operation and sustainability. | A healthcare organization can use a budget plan to evaluate whether resources are being used as planned. Further, a healthcare organization can use profit information from the income statement to decide how much cash should be retained for day-to-day activities. |
| What is cash vs. accrual accounting methods? | The cash accounting method records transactions when cash is received or disbursed, reflecting the actual cash flow.
Accrual accounting records transactions when they occur, regardless of when cash for the transactions is received (Eulner & Waldbauer, 2022). |
A payment received in cash for medical services is recorded under the cash accounting method. On the other hand, recording a transaction for medical services offered whose cash is yet to be received is an example of an accrual accounting method. |
| What is a pro forma income statement? What is its purpose? | A pro forma income statement is a hypothetical financial statement that shows projected revenues and expenditures (Jalbert, 2019). It estimates future incomes and expenditures for decision-making, financial planning, and control measures. | An income statement for the upcoming financial period of a healthcare organization containing revenues and expenditures is an example of a proforma income statement. The figures in the statement can guide the organization in evaluating its performance by comparing actual and projected figures. |
| What is a prepaid expense? What is its purpose? | A prepaid expense is an expense that is yet to be incurred, but payment for it has been made. It is used for accurate financial reporting to ensure expenses are recognized in their appropriate periods. | An electricity bill paid for next year for a medical facility is an example of a prepaid expense. Recognizing it currently as a prepaid expense ensures expenses are aligned with corresponding revenue recognition, thus achieving accurate financial reporting. |
| Why is it important to identify your internal or external key stakeholders in the financial data? | Identifying the financial data’s internal or external key stakeholders is crucial to ensure the needs are met through reporting. Internal and external stakeholders use the financial data for different purposes. Identifying them helps in enhancing the objectivity of the financial data. | Employees are an example of internal stakeholders that use financial data. They use it to understand the organization’s health to meet their needs. Investors are examples of external stakeholders. They use financial data to make investment decisions. Identifying them helps in ensuring that financial data can inform investment decisions. |
| As a department head, when would you use a budget? How would you use it? | I would use a budget at the start of a financial period to estimate and monitor expenditures throughout the financial period. I would use the budget to evaluate firm performance by comparing estimated figures for expenses and actual performance. Notably, this will help to make correctional measures that will enhance performance. | A pro forma income statement prepared by a medical facility at the start of a financial period can be considered an example of a budget. Its figures can be compared to that of a real income statement to establish positive and negative variances and corrective measures taken to reduce negative variances. |
Part 2: Short Answer:
Now that you have defined a pro forma income statement and its purpose, when would you use a pro forma income statement as a health care manager? How is this process similar to a budgeting process?
As a healthcare manager, I would use the pro forma income statement during strategy decision-making meetings. During this meeting, comparisons between actual performance and projections within the pro forma income statements will be made. Notably, this process is similar to a budgeting process because it entails making estimates and comparing them with actual performance, which is the case in budgeting.
What is the importance of data analysis in the accounting process? How is it important to you as a healthcare manager?
Data analysis in the accounting process is important because it identifies patterns that can be used in strategic decision-making. Further, it offers insight into organizational performance. Data analysis is important to a health manager because it helps establish trends and how the organization compares with competitors. As a result, competitive strategies can be crafted for implementation.
What is depreciation and its three elements? How is straight-lined depreciation calculated? How do healthcare managers use this?
Depreciation entails allocating the cost of a long-term asset over its useful life. The three depreciation elements are the asset’s cost, its estimated useful life, and its estimated salvage value. Straight-line depreciation is calculated by subtracting the salvage value from the cost and dividing it by the useful life. Healthcare managers use depreciation to accurately represent the wear and tear of assets and plan for future replacements or upgrades while maintaining financial stability.
The 3 basic tools for financial statements are ratio, horizontal, and vertical analysis.
What is the importance of ratio analysis? What are the four main categories? How would a healthcare manager use ratio analysis?
Ratio analysis is crucial for assessing a healthcare institution’s performance and financial health. Liquidity, profitability, efficiency, and solvency ratios are the four primary types of ratios. Ratio analysis may be used by management in the healthcare industry to evaluate operational effectiveness and financial stability and pinpoint development opportunities. It aids in decision-making, budgeting, financial forecasting, and evaluating the performance of the business in comparison to industry standards or earlier times.
What is the importance of horizontal analysis? How would a healthcare manager use horizontal analysis?
Evaluating a healthcare organization’s financial performance and changes over time requires horizontal analysis, sometimes referred to as trend analysis. In order to find trends, patterns, and major variances, financial statement data from several eras are compared. Horizontal analysis may be used by healthcare management to identify changes in income, costs, profitability, and important financial indicators. Making educated decisions for future planning and resource allocation is made easier with this information, which also helps identify areas of development or decline and assess the efficacy of measures.
What is the importance of vertical analysis? How would a healthcare manager use vertical analysis?
Understanding the relative composition of financial statements within a healthcare company requires conducting a vertical analysis. Each item is expressed as a percentage of the total of some other number, usually total assets or total income. Healthcare management can utilize vertical analysis to determine the percentage of costs, assets, or liabilities, review cost structures, determine how adjustments to individual line items would affect the total, and draw comparisons across various periods or with benchmarks from the industry.
References
Eulner, V., & Waldbauer, G. (2022). Cash versus accrual accounting for the public sector—EPSAS. Public Money & Management, 42(6), 463-466.
Jalbert, T. (2019). A management-focused tool for developing pro-forma financial statements. International Journal of Management and Marketing Research, 12(1), 61–86.
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Question 
As a healthcare manager, you will be analyzing the ways financial information is used in healthcare organizations.
Budgeting and Accounting Overview
Understanding accounting fundamentals, how transactions make it to the financial statements, where the financial data is coming from, and the budget or time-over-time variances will assist you in making informed budgeting and daily operational decisions in the future.
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