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Healthcare Financial Concepts

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Healthcare Financial Concepts

GAAP in Healthcare Organizations

Article Summary

The article, The generally accepted accounting principles (GAAP), the status between a

going concern and change by Irdiny et al. (2021) considers generally accepted accounting

principles (GAAP) as the collection of commonly recognized principles, governing an

organization’s accounting procedures, rules, and standards guiding the preparation of financial

statements and reporting to prevent disputes between accountants when in real-life application.

Healthcare organizations are expected to release their statements annually to show investors,

banks, and creditors the credibility with which they should disclose financial reports to ensure

fairness in the reported financial statements and accounting information (Irdiny et al., 2021).

GAAP is structured based on four major assumptions, including the business entity, going

concern, monetary unit, and the time period principle. Additionally, hospitals apply the GAAP

financial concept to ensure compliance with the federal policies and principles guiding

accounting principles, such as cost, revenue, matching, and disclosure (Anonymous, 2022). For

example, the cost principle ensures that the healthcare organization reports all values listed to

ensure that it obtains the necessary assets rather than the fair market value. Further, healthcare

organizations apply the four basic constraints, such as objectivity, materiality, consistency, and

prudence to ensure compliance with the existing local, state, and federal policies regarding what

type of information should be included in the financial statements (Irdiny et al., 2021).

Generally, the four basic constraints ensure that healthcare organizations use similar accounting

methods and principles annually to ensure consistency. For instance, compliance with the
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concept of prudence will prevent the possibility of overstating the organization’s assets and

incomes.

Furthermore, the business entity concept is a financial concept that helps healthcare

organizations to distinguish between their personal affairs and those of the business to avoid

mixing personal assets with those of the organization when preparing the balance sheet. This is

essential since it ensures that the organization's balance sheet reflects its financial position alone

with the exact transaction and without including personal expenditures that can negatively affect

the operating results. The continuity concept ensures that the organization continues to operate

regardless of the existing and emerging challenges while the principle of conservatism explicitly

details the accounting procedures to ensure fairness and reasonableness in preparing business

estimates, evaluations, and practical applications of accounting procedures (Irdiny et al., 2021).

However, the objectivity principle helps healthcare organizations determine the exact values of

specific transactions to avoid bias. Most hospitals also operate based on the revenue recognition

convention to ensure timely completion and processing of payment. However, the matching

principle determines the relationships between the expenses and revenues earned in the

organization to determine if it is making a profit from its original investment. Other key GAAP

concepts include cost, consistency, full disclosure, and materiality principles (Anonymous,

2022). Generally, GAAP provides the key guidelines for healthcare organizations to ensure

consistency with which they prepare financial statements and that those statements are relevant

and appropriate for making future financial estimates. Importantly the estimates must reliability

and comparability.

Application of GAAP in the Workplace

I currently work at John Hopkins Hospital and I always use GAAP as a framework for

preparing balance sheets, cash flow statements, net assets statements, and the organization’s

statements of operation. I use GAAP as the basic framework for consolidating the organization’s

financial status and its entity concept ensures the accurate allocation of financial resources for

education and related services, research, and professional clinical services. Again, I usually apply

the matching concept to determine the relationships among the amount of financial resources

invested in professional clinical services, research training and related services, and education

and related services. Such relationships are essential in determining the rate of return and overall

profitability of the healthcare organization; hence, GAAP acts as the basis for presenting and

using the estimates. For example, I use GAAP to determine the specific amounts of cash, cash

equivalents, and operating investments that I should allocate to fund daily cash needs.

Time Value of Money in Healthcare Organizations

Article Summary

By definition, the time value of money is a financial concept, which maintains that the

present money is worth more than what the same amount will be in the future. From an analytical

perspective, the value of money depreciates when considering the potential earning capacity of

that similar amount of money compared to the future identical sum. The article, The Importance

of the Time Value of Money by Alzaabi & Nobanee (2022) maintains that the sooner an

organization receives a certain sum of money, the better its worth due to the potential earning

capacity of the present amount received compared to the future. Therefore, once the money can

earn better interest, it is important to receive it as early as possible to retain its discounted value.

Most rational investors believe that it is better to receive money in its present value and not in its

future value because the current amount obtained can increase in value over time. Notably, the
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time value of money is characterized by key variables, such as the present value, the future

value, and the timeline. The present value is always considered to be the current investment that

the investor has at hand, such as the initial capital used to start a business. For healthcare

organizations, the future value involves earning interest that accumulates over time in the process

of delivering healthcare services. The other key variable is the number of periods that dictates the

timeline for investment in healthcare organizations. Healthcare organizations investing money

must consider the interest rate, which is the growth of the initial amount of money invested over

a given period and expressed as a percentage. When borrowing money from financial

institutions, healthcare organizations must consider the payment amount, which is the series of

equal and even cash flows. A typical example is when a healthcare organization offers services

to clients and expects payments from the government, especially when the services are to be paid

for by a national health insurance scheme. It would be appropriate to receive the reimbursements

in the present value rather than in the future value because the former guarantees a better option

due to more value, associated benefits, and the opportunity cost that comes with it.

Application of Time Value of Money in the Workplace

I work at John Hopkins Hospital and I always recommend that the federal government

should reimburse the organization on a timely basis rather than withholding money for a long

period to ensure that we benefit from the time value of money. The time value of money is a very

important concept for me as a healthcare specialist because the money at hand is better than the

money promised in the future. Finances obtained in the future are worth less because inflation is

likely to reduce the worth of future money. We can use the money presently received to invest in

the healthcare organization to increase current investment and earn interests and capital gains.

For example, we can invest the money in current investment by purchasing medical equipment to
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earn compound interest and buy land to generate capital gains that will be worth more in the

future when expanding healthcare premises.

References

Alzaabi, H. & Nobanee, H. (2022). The Importance of the Time Value of Money.

https://www.researchgate.net/publication/358226938_The_Importance_of_the_Time_Val

ue_of_Money

Irdiny, T. A. H., Jameel, Z. S. M., & Alyamoor, A. H. (2021). The generally accepted accounting

principles (GAAP), the status between a going concern and change. Academy of

Accounting and Financial Studies Journal, 25(6), pp. 1-12.

Anonymous. (2022). GAAP: General Accepted Accounting Principles. US Government.

http://diversionservices.dsd.gov.za/FORMS/download/gaap_info%20(1).pdf