1. Accounting and Cash Flow Analysis
Chapter 3
Accounting and Cash Flow Analysis

2. Why do we need to study accounting?
Financial managers need to analyze the accounting records to…
Understand how things have worked in the past
Effects of a course of action
Costs and benefits of an action

3. Fields of accounting practice
Financial accountant = designs procedures for the recording of transactions, supervises that record-keeping function, and is responsible for summarizing records in financial statements
Managerial accountant = take information about the costs of doing business from the financial records. Once information is gathered, they analyze it to find out how costs change with changing volume and how well management is doing at controlling costs
Auditors = responsible for verifying that financial statements are prepared with GAAP
Internal auditor = ensure that adequate records are maintained to support the financial statements that the organization presents

4. Professional organizations
HFMA
CHFP
FHFMA

5. Accounting Principles
Basic accounting equation = Assets = liabilities + owner’s equity
Assets = all things (tangible and intangible) that are owned
Tangible
Intangible
Current assets
Liabilities = all items that the entity owes to other
Accounts payable
Interest payable
Long-term debt
Current liabilities
Owner’s equity = difference between the value of the entity’s assets and its liabilities. It is what could be claimed were owned that could be liquidated

6. Debits & Credits
Two sides are typically called Debits (left) = credit (right)

7. Monetary terms
Monetary terms = all items must be written in terms of money
Example: What vehicles are in possession

8. VEHICLES IN POSSESSION
Vehicle
WRONG
One 15 –year old ambulance
CORRECT
$35,000

9. EXAMPLE
Example: Patient A receives surgery for a compound fracture in June but hospital gets paid for services in August. The organization receives $50,000
Surgery for compound fracture for Patient A = Wrong
Procedure
Cost of services
June
Compound fracture
July
August
50,000
Procedure
Cost of services
June
Compound fracture
50,000
July -
August

10. RULES FOR CREDITS AND DEBITS
ASSETS = LIABILITIES (EQUITY)
ASSETS GOES UP = DEBITS
ASSETS GOES DOWN = CREDIT
LIABILITY/EQUITY GOES UP = CREDIT
LIABILITIES/EQUITY GOES DOWN = DEBITS
REVENUES = ARE ALWAYS CREDIT
EXPENSES = ARE ALWAYS DEBITS
Basic accounting entries = double-entry = each transaction will go on to different ledgers (debits and credits)

11. TABLE 3-1: Initial contribution of capital
Investor provided 100K in cash to start HHSC
Date
Transaction
dr (debits)
cr (credits)
1/1/2013
Cash
Paid-in capital
$100,000.00

12. TABLE 3-2: First revenues received
Contract for home health visits - $50/visit = paid only at the end of the quarter
January – February – March (1st quarter)
January = 1st month of quarter, no money until quarter ends = early April
120 visits
AR = money owed for services rendered, but not yet paid
Date
Transaction
dr (debits)
cr (credits)
1/31/2013
Accounts receivable
Revenue
$6,000.00

13. TABLE 3-3: Nursing service expense incurred
Three nurses make home health visits and are paid as contracts at a rate of $35/visit
End of January, they have to be paid a total of $4,200
Date
Transaction
dr (debits)
cr (credits)
1/31/2013
Nursing service expense
Cash
$4,200.00

14. Table 3-4: Purchase of computing equipment for cash
Purchase a personal computer system to use in managing the accounts
Cost to purchase and install the system was $6,000
Date
Transaction
dr (debits)
cr (credits)
1/15/2013
Computing equipment
Cash
$6,000