1. Generally Accepted Accounting Principles (GAAP)
September 12, :00 – 5:00 PM
Amber Popek, CPA
Senior Manager

2. objectives
Fundamentals of GAAP (Generally Accepted Accounting Principles)
Interpretation of financial statement
Key performance indicators

3. What is gaap? GAAP = Generally Accepted Accounting Principles
Definition: Rules of accounting created by the
Financial Accounting Standards Board (FASB) for
use in the United States of America.
Purpose: To ensure companies produce financial information that is useful to existing and potential users of the financial information in making decisions for or about the company.
For financial information to be useful, it must possess two characteristics:
1) Relevance – makes a difference in decision making
2) Faithful representation – fully depicts the economic substance of business activities
Why do we need GAAP?
It ensures consistency in reporting and presentation of financials

4. Methods of accounting Cash Basis Accrual Basis
Recording revenues when cash is received and recording expenses when cash is paid
Does not accurately present the true financial picture of the company at a given time
NOT allowed under GAAP
Accrual Basis
Recording revenues when earned and recording expenses when incurred, regardless of the timing of cash receipts collected or cash payments made
More accurately reflects the financial position of the company at a point in time
The only acceptable method of financial reporting under GAAP

5. Basic Gaap principles Revenue Recognition Principle
Expense Recognition Principle
Historical Cost Principle
Consistency Principle
Disclosure Principle

6. Fundamentals of accrual accounting
Revenue Recognition Principle
Revenues should be recognized when they are earned
Once the company has fulfilled its obligation to the customer/patient by doing what it promises to do
Typically this occurs at the point of delivery of goods or services
Example Journal Entries
If payment received at the
If payment is not received at the time services are provided:
time services are provided:
DEBIT: Accounts Receivable
DEBIT: Cash
CREDIT: Revenue
When payment is received:
CREDIT: Accounts Receivable

7. fundamentals of accrual accounting
Expense Recognition Principle (The “Matching Principle”)
Expenses should be recognized in the same period that revenues with which they can be reasonably associated
Example: RN salary expense should be recorded in
the same period that revenue from the nursing visit
is recorded
Example Journal Entries
To record nursing visit revenue
(cash not received at time of service):
To record RN salary expense:
DEBIT: Accounts receivable
DEBIT: Salary expense
CREDIT: Revenue
CREDIT: Accrued payroll

8. Other principles of gaap
Historical Cost Principle
Assets should be recorded at their actual cost,
measured on the date of purchase
Consistency Principle
The same accounting methods of recording transactions should be used by a company from period to period
Disclosure Principle
A company’s financial statements should report enough information for the user to make informed decisions about the company

9. Accounting estimates
Sometimes estimates are required in financial statements in order to record certain transactions when the value is uncertain
Definition: An approximation in the amount recorded for a financial statement item when there is no precise means of measurement.
Estimates are based on management’s judgment and specialized knowledge derived from past experience.

10. Allowance for doubtful accounts
One common estimate in the health care industry is to estimate the net realizable value of accounts receivable
Example Journal Entry
To record estimate for AR allowance:
DEBIT: Bad debt expense
Since we know that some receivables never actually get collected 
CREDIT: Allowance for doubtful accounts
Gross Accounts Receivable
Doubtful Accounts
Less: Allowance for
Net Accounts Receivable

11. Allowance for doubtful accounts
A typical method to estimate for potentially uncollectible receivables is to reserve a percent of the aging “buckets” by payer
Management should tailor these percentages based on historical collection and write-off experience
Other methods of estimation are acceptable but should be consistent from period to period

12. Financial statement overview
Balance Sheet
(Statement of Financial Position)
Reports the amount of assets, liabilities, and owner’s equity (for-profit) or net assets (non-profit) of an entity at a point in time.
Asset = Liabilities + OE/NA

13. Balance sheet line items
ASSETS
Current
Cash
Investments
Accounts Receivable
Inventory
Prepaid Expenses
Non-Current
Property and Equipment
Intangible Assets

14. BALANCE SHEET LINE ITEMS
LIABILITIES
Current
Accounts Payable
Accrued Expenses
Deferred Revenue
Long-Term
Notes Payable
Capital Lease Obligation

15. Balance sheet line items
For-Profit
Not-For-Profit
EQUITY
NET ASSETS
Stock
Unrestricted
Additional Paid-in-Capital
Temporarily Restricted
Retained Earnings (Deficit)
Permanently Restricted
Distributions

16. Financial statement overview
Income Statement (Statement of Operations) Reports the revenues and expenses of an entity during a period of time. Revenues – Expenses = Net Income (Loss)

17. Income statement line items: revenues
Operating Revenue Patient Service Revenue Less: Contractual Adjustments Net Patient Service Revenue Other Operating Revenue Non-Operating Revenue/Other Income Contributions/Donations Investment Return

18. Income statement line items: expenses
Direct Expenses
Indirect Expenses
Expenses directly related to the care of patients
Expenses not directly related to the care of patients
Professional salaries
Administrative salaries & benefits
Benefits attributed to these salaries
Rent & utilities
Medical supplies
Office supplies
Mileage reimbursement/
Depreciation
transportation for field staff
Marketing
Contract labor
Bad debts

19. Performance measures How do we measure financial success? Gross Profit
Net operating revenue – direct expenses
Operating Income (Loss)
Net operating revenue – operating expenses
Net Income (Loss)
Total revenue – total expenses
EBITDA
Earnings Before Income Tax,
Depreciation & Amortization

20. Key performance indicators
Profitability
Gross Profit Margin = Gross profit / Net revenue
Net Profit Margin = Net income (loss) / Net revenue
Return on Assets = Net income (loss) / Total assets
Return on Equity = Net income (loss) / Total equity
Other Operating Indicators
Labor as a % of Revenue
A&G as a % of Revenue

21. Key performance indicators
Cash Flow
Days in AR = Accounts receivable / (Net revenue / 365)
Days Payable Outstanding = Accounts payable / (Operating expenses /365)
Days Cash On Hand = Cash balance / (Cash expenses / 365)
Days Cash & Investments On Hand = Cash + Investments / (Cash expenses / 365)
Cash Expenses = Operating expenses excluding non-cash expenses, such as depreciation, amortization, loss on sale of asset (no cash paid for these)

22. Key performance indicators
Liquidity
Current Ratio = Current assets / Current liabilities
Working Capital = Current assets – Current liabilities
Debt to Equity = Total liabilities / Total equity

23. Benchmark targets
The table below includes certain suggested revenue cycle benchmark targets

24. summary

25. Questions?