Generally Accepted Accounting Principles Essay

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Generally Accepted Accounting Principles Essay
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  • University/College:
    University of Chicago

  • Type of paper: Thesis/Dissertation Chapter

  • Words: 989

  • Pages: 4

Generally Accepted Accounting Principles

In recent years healthcare systems have become more like business entities than health care providers. Technology is continually evolving so is healthcare and its financial approach. Generally Accepted Accounting Principles (GAAP), is a guide used by healthcare providers to account for their financial activities. GAAP is a guideline or a group of objectives and concepts that have evolved over 500 years from the basic concepts of Luca Pacioli set forth in the 1400s (Omar, 2010). It comprises a set of principles that have been developed by the accounting profession. According to Saunders (1993), “Financial Accounting Standards Board (FASB) established the rules and guidelines which require CPAs to indicate whether an audited set of financial statements is in compliance with GAAP” (p. 104). They are five principles and each one will be discussed in relation to healthcare. These are paramount to the effectiveness of business accounting. Accounting principles include the following: accounting entity, money measurement, duality, cost evaluation, and stable monetary unit.

Accounting Entity

An accounting entity is the business or corporation that performs clear economic activities, separate from any personal economic endeavors (Cleverly, Cleverly, & Song 2011). In health care accounting entities can be surgical centers, hospitals, clinics, home health agencies, nursing homes, or other entities that are part of a larger health care network. An accounting entity requires financial records that define organizations financial activities that are clear and concise. Cleverly, Cleverly & Song (2011) states that if an entity is not properly defined, evaluation of its financial information may be useless at best and misleading at worst. The entity is expected to maintain its accounting records in accordance to GAAP.

Money Measurement

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement as a contribution to the accounting theory of extensive measurement (Scrimnger, & Musvoto,2011). Resources and liabilities have to be considered and calculated to determine accurate money measurement in an organization. These resources are referred to as assets, which include money, buildings and equipment. In health care these assets include, buildings, cash-flow, and equipment. Liabilities will be salaries to the employees and loans owed from banks and any other companies they are in business with. In most normal situations assets exceed liabilities in money measured value (Cleverly, Cleverly & Song 2011). An entity shall not recognize an element of financial statement unless a reliable value can be assigned to it. Duality. This is a fundamental convention of accounting that necessitates the recognition of all aspects of an accounting transaction.

According to Cleverly, Cleverly & Song (2011), “The value of assets must always equal the combined value of liabilities and residual interest, which we have called net assets”. He goes on to explain the basic accounting equation, the duality principle, may be stated as follows: Assets=Liabilities +Net assets. In any given situation the value of assets will always equal the value of claims. Cost valuation. When looking at an organization one needs to know about the assets and their value. When assets are recognized the basis for valuation needs to be determined. The two bases are historical and fair value (Saunders, 1993). The amount paid for the asset is the basis for valuation which is referred to historic and fair value is the amount an asset could be exchanged between knowledgeable willing parties. The firm’s accounting statements reflect the company’s financial status and this is presented in the balance sheet. GAAPs in the United States require the valuation of fixed assets at historical cost, adjusted for any estimated gain and loss in value from improvements and the aging, respectively, of these assets.

As mentioned previously hospitals now operate as business entities, and their accounting operation is the same as any other entity. Stable monetary unit. In any organization, the monetary unit principle assumes that the value of the unit currency in which you record transactions remains stable over time. This concept allows accountants to disregard the effect of in inflation, a decrease in terms of real goods of what the dollar can purchase. Monetary unit assumption makes accounting process manageable however it can be problematic. If in any case the value of money changes rapidly due to market conditions or policy changes, a business’s financial statements may be less useful for comparison with prior records (Omar, 2010).

Accounting focuses on the financial aspects of the business and that too for matters which can be expressed in terms of currencies. Nurse Managers must be able to communicate with financial managers of the organization as they help steer the overall direction of the organization (Saunders, 1993). The health care operation relies on revenues from patients billing and in turn help sustain the business on them and any other income. Health care systems are able to run business successfully by using GAAP guidelines. We have seen in this discussion that the five principles of accounting are essential in daily business operation. The understanding of accounting entity, money measurement, duality, cost valuation and stable monetary unit will help any health organization to manage their finances well.

References
Cleverly, W. O., Cleverly, J. O., & Song, P. H. (2011) Essentials of health care finance (7th ed.). Sudbury, MA: Jones and Bartlett. Omar, O. (2010). Why Generally Accepted Accounting Principles Should Inform U.C.C. Article 9 Decisions. Texas Journal Of Law Review, 89(1), 207-226. Saunders, G. (1993) Accounting principles (5th ed.). Hoboken, NJ: John Wiley & Sons. Scrimnger, C. C., & Musvoto, S.W. (2011). The Accounting Concept of Measurement And The Thin Line Between Representational Measurement Theory And The Classical Theory of Measurement. Journal of International Business and Economics Research, 10(5), 59-68.

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Generally Accepted Accounting Principles Essay

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Generally Accepted Accounting Principles Essay
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  • University/College:
    University of California

  • Type of paper: Thesis/Dissertation Chapter

  • Words: 699

  • Pages: 3

Generally Accepted Accounting Principles

11. a. Year 0 Year 1 Year 2 Year 3 Year 4
Before-tax cash flow $(500,000) $52,500 $47,500 $35,500 $530,500
Tax cost (7,875) (7,125) (5,325) (4,575)
After-tax cash flow 44,625 40,375 30,175 525,925 Discount factor (7%) .935 .873 .816 .763
Present value $(500,000) $41,724 $35,247 $24,623 $401,281
NPV $2,875
Investor W should make the investment because NPV is positive.

b. Year 0 Year 1 Year 2 Year 3 Year 4
Before-tax cash flow $(500,000) $52,500 $47,500 $35,500 $530,500 Tax cost (10,500) (9,500) (7,100) (6,100) After-tax cash flow 42,000 38,000 28,400 524,400 Discount factor (7%) .935 .873 .816 .763

Present value $(500,000) $39,270 $33,174 $23,174 $400,117
NPV $(4,265)
Investor W should not make the investment because NPV is negative.

c. Year 0 Year 1 Year 2 Year 3 Year 4
Before-tax cash flow $(500,000) $52,500 $47,500 $35,500 $530,500 Tax cost (5,250) (4,750) (8,875) (7,625) After-tax cash flow 47,250 42,750 26,625 522,875 Discount factor (7%) .935 .873 .816 .763
Present value $(500,000) $44,179 $37,321 $21,726 $398,954
NPV $2,180
Investor W should make the investment because NPV is positive.

16. a. Opportunity 1: Year 0 Year 1 Year 2
Taxable income (loss) $(8,000) $5,000 $20,000
Marginal tax rate .40 .40 .40
Tax $(3,200) $2,000 $8,000
Before-tax cash flow $(8,000) $5,000 $20,000
Tax (cost) or savings 3,200(2,000) (8,000)
Net cash flow $(4,800) $3,000 $12,000
Discount factor (12%) .893 .797
Present value $(4,800) $2,679 $9,564
NPV $7,443

Opportunity 2: Year 0 Year 1 Year 2
Taxable income $5,000 $5,000 $5,000
Marginal tax rate .40 .40 .40
Tax $2,000 $2,000 $2,000
Before-tax cash flow $5,000 $5,000 $5,000
Tax (cost) or savings (2,000) (2,000) (2,000)
Net cash flow $3,000 $3,000 $3,000
Discount factor (12%) .893 .797
Present value $3,050 $2,679 $2,391
NPV $8,120
Firm E should choose opportunity 2.

b. Opportunity 1: Year 0 Year 1 Year 2
Taxable income (loss) $(8,000) $5,000 $20,000
Marginal tax rate .15 .15 .15
Tax $(1,200) $750 $3,000
Before-tax cash flow $(8,000) $5,000 $20,000
Tax (cost) or savings 1,200 (750) (3,000)
Net cash flow $(6,800) $4,250 $17,000
Discount factor (12%) .893 .797
Present value $(6,800) $3,795 $13,549
NPV $10,544

Opportunity 2: Year 0 Year 1 Year 2
Taxable income $5,000 $5,000 $5,000
Marginal tax rate .15 .15 .15
Tax $750 $750 $750
Before-tax cash flow $5,000 $5,000 $5,000
Tax (cost) or savings (750) (750) (750)
Net cash flow $4,250 $4,250 $4,250
Discount factor (12%) .893 .797
Present value $4,250 $3,795 $3,387
NPV $11,432
Firm E should choose opportunity 2.

c. Opportunity 1: Year 0 Year 1 Year 2
Taxable income (loss) $(8,000) $5,000 $20,000
Marginal tax rate .40 .15 .15
Tax $(3,200) $750 $3,000
Before-tax cash flow $(8,000) $5,000 $20,000
Tax (cost) or savings 3,200 (750) (3,000)
Net cash flow $(4,800) $4,250 $17,000
Discount factor (12%) .893 .797
Present value $(4,800) $3,795 $13,549
NPV $12,544

Opportunity 2: Year 0 Year 1 Year 2
Taxable income $5,000 $5,000 $5,000
Marginal tax rate .40 .15 .15
Tax $2,000 $750 $750
Before-tax cash flow $5,000 $5,000 $5,000
Tax (cost) or savings (2,000) (750) (750)
Net cash flow $3,000 $4,250 $4,250
Discount factor (12%) .893 .797
Present value $3,000 $3,795 $3,387
NPV $10,182
Firm E should choose opportunity 1.

1. a. (1) Year 0 Year 1 Year 2
Before-tax salary/income $80,000 $80,000 $80,000
Marginal tax rate .25 .40 .40
Tax on income $20,000 $32,000 $32,000

After-tax cash flow $60,000 $48,000 $48,000
Discount factor (8%) .926 .857
Present value $60,000 $44,448 $41,136

NPV of salary received by Mrs. X $145,584

(2) Before-tax payment /deduction $80,000 $80,000 $80,000
Marginal tax rate .34 .34 .34
Tax savings from deduction $27,200 $27,200 $27,200

After-tax cost $(52,800) $(52,800) $(52,800)
Discount factor (8%) .926 .857
Present value $(52,800) $(48,893) $(45,250)

NPV of salary cost to Firm B $(146,943)

b. (1) Year 0 Year 1 Year 2
Before-tax salary/income $140,000 $50,000 $50,000
Marginal tax rate .25 .40 .40
Tax on income $35,000 $20,000 $20,000

After-tax cash flow $105,000 $30,000 $30,000
Discount factor (8%) .926 .857
Present value $105,000 $27,780 $25,710

NPV of salary received by Mrs. X $158,490

(2) Before-tax payment /deduction $140,000 $50,000 $50,000
Marginal tax rate .34 .34 .34
Tax savings from deduction $47,600 $17,000 $17,000

After-tax cost $(92,400) $(33,000) $(33,000)
Discount factor (8%) .926 .857
Present value $(92,400) $(30,558) $(28,281)

NPV of salary cost to Firm B $(151,239)

c. Year 0 Year 1 Year 2
Before-tax payment /deduction $140,000 $45,000 $45,000
Marginal tax rate .34 .34 .34
Tax savings from deduction $47,600 $15,300 $15,300

After-tax cost $(92,400) $(29,700) $(29,700)
Discount factor (8%) .926 .857
Present value $(92,400) $(27,502) $(25,423)

NPV of salary cost to Firm B $(145,325)

This proposal is superior (has less cost) to Firm B than its original offer.

d. Year 0 Year 1 Year 2
Before-tax salary/income $140,000 $45,000 $45,000
Marginal tax rate .25 .40 .40
Tax on income $35,000 $18,000 $18,000

After-tax cash flow $105,000 $27,000 $27,000
Discount factor (8%) .926 .857
Present value $105,000 $25,002 $23,139

NPV of salary received by Mrs. X $153,141

Mrs. X should accept this counterproposal because it has
a greater NPV than Firm B’s original offer.

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Generally Accepted Accounting Principles Essay

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Generally Accepted Accounting Principles Essay
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  • University/College:
    University of Arkansas System

  • Type of paper: Thesis/Dissertation Chapter

  • Words: 505

  • Pages: 2

Generally Accepted Accounting Principles

A. What is the difference between a contribution income statement and a traditional income statement?

Contribution income statement is an income statement that classifies cost by behavior (fixed cost and variable cost). Traditional income statement is sometimes called the functional income statement. It is an income statement prepared in the multiple-step or single –step income statement format which conforms to Generally Accepted Accounting Principles (GAAP) and can be used for external financial reporting. The main difference between the two is that the contribution income statement list variable costs first, followed by fixed costs. Keeping in mind that GAAP and does not permit businesses to use the contribution income statement for financial accounting – it is used only for internal decision making purposes.

B. What is the difference between absorption costing and variable costing?

Absorption costing is a costing method where product cost includes all the costs to acquire products and get them ready to sell regardless of whether the costs are variable or fixed. Generally Accepted Accounting Principles requires business to use absorption costing for financial accounting. Variable costing is a method of costing where only the costs to acquire products or to get them ready to sell that vary with output are treated as product costs. In other words, only variable product costs are treated as product costs. For manufactures, the difference between absorption costing and variable costing is significant.

For example, when Caterpillar uses absorption costing to determine the cost of manufacturing, its product cost includes the direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead cost incurred to make the bulldozer. These costs are added to inventory and they are not expensed as cost of goods sold until the bulldozer is sol. However, when Caterpillar uses variable costing, product cost, includes only direct material, direct labor, and variable manufacturing overhead costs. Under variable costing all of Caterpillar’s fixed manufacturing overhead cost is treated as period cost. When Caterpillar uses variable costs are added to inventory (direct material, direct labor, and variable manufacturing overhead). Under variable costing, Caterpillar expenses fixed manufacturing overhead as it is incurred just like it does other period cost such as selling and administrative expense.

F. What is the contribution margin ratio and how does it differ from the contribution margin?

Contribution margin is the amount remaining after all variable costs have been deducted from sales revenue. It is an important piece of information for managers, because it tells them how much of their company’s original sales dollars remain after deducting variable cost. Contribution margin ratio is the contribution margin expressed as a percentage of sales. Contribution margin ratio can be calculate by dividing the total contribution margin by total sales or by dividing the per unit contribution margin by per unit selling prices.

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Generally Accepted Accounting Principles Essay

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  • University/College:
    University of Arkansas System

  • Type of paper: Thesis/Dissertation Chapter

  • Words: 838

  • Pages: 3

Generally Accepted Accounting Principles

The mutual set of accounting criteria used to develop medical centers financial statements are known as generally accepted accounting principles (GAAP). GAAP are a mixture of respected criteria created by Securities and Exchange Commission (SEC) and accountants. The SEC has authority granted by The Securities Act of 1933 and the Securities Exchange Act of 1934, to determine reporting and disclosure requirements. Oversight is the general functions of the SEC, granting the Governmental Accounting Standards Board (GASB) to determine the standards.

Generally accepted accounting practices are required for accountant to follow and medical centers to use so medical centers and provide investors with a minimal level of dependability for financing determination. GAAP provides detailed information concerning the medical center fiscal returns, detailed balance and outstanding debt. GAAP guidelines are expected to be upheld by medical centers when giving an account of their economic figures through financial declarations (Finkler & Ward, 2006). Going concern principle. Financial statements must be prepared with the belief that the medical center will continue operation indefinitely.

Disclosure of pending cease of patient care delivery must be noted in financial statement (Finkler & Ward, 2006) Principle of conservatism. Certified public accountants have an obligation to document business purchases that necessitate estimation based on their sound judgment. The total medical equipment productivity time frame and outstanding accounts receivable are illustrations for the use of estimation. In financial data reporting, auditors adhere to conservatism rules, which demands lower appraisal be selected when one or more appraisals are taking in consideration.

For example, when the restoration department has reported a five -percent rate return for new MRI machine for the previous three fiscal years, but the medical centers production department claims the reported profit value is inconsistent and there is an expectation that fewer than three percent of the MRI machines will need repair service during the following year. Since there is a discrepancy, the production department will need to presents undeniable proof to authentication the appraisal, the medical center auditor has a duty to adhere to the conservatism principles and prepare for the ive-percent rate return.

Losses and costs are documented when they are credible and equitably estimated. Profits are documented when achieved (Finkler & Ward, 2006). Matching principle. The medical center expenditures for providing safe patient care should be documented with the corresponding fiscal year in which the income was produced. Documented in the same fiscal year as the income they help to generate. An illustration of this particular cost is the cost of products sold in the medical center, salaries paid to staff.

It is consider when patients are admitted to the medical center and the supplies used to provide safe quality care. Revenue is recognized when reimbursed by Medicaid and Medicare (Finkler & Ward, 2006). Cost principle. The dollar amount deducted from the budget to purchase land, medical equipment, and supplies. Assets are documented at price purchased, which is equivalent to the price paid to gain acquisition. When a medical centers assets such as property or office structures increase in worth each fiscal year, reappraisal in not required for financial reporting purposes (Finkler & Ward, 2006).

Objective evidence. For financial reports to be valuable, they must contain information that is pertinent, trustworthy, and organized in a consistent manner. The cost information provided is evidence-based. This means internal and external users could all agree when the medical center reports they purchased telehealth technology for 1. 5 million and they can produce evidence in a form of bank statements or detailed receipt from vendor proving payment, this is reliable information that is verifiable and objective (Finkler & Ward, 2006).

Materiality principle. Obligates the preparer of the financial report to correct significant errors that otherwise would cause an individual to make a different decision if provided with correct information. When time approaches to approve the budget for additional telehealth equipment, medical center executive may not approve, if they were aware that the program is not beneficial and several telehealth monitors were sitting in storage areas with the local facilities. Insignificant errors may be ignored (Finkler & Ward, 2006). Consistency.

Medical facilities should use the same accounting methods each fiscal year. Consistency make available significant associations to be achieved among separate fiscal years and among the fiscal reports of separate establishments that employ the similar accounting practices. If the medical center changes their accounting method, the accountant must disclose the change in the financial report (Finkler & Ward, 2006). Full disclosure principle. Financial statements usually make available data about the medical center previous performance.

However, imminent litigations, unsettled debt, or additional circumstances that have the potential to produce considerable negative influences on the medical centers economic status are also required to be disclosed in financial statements. (Finkler & Ward, 2006). In conclusion when medical centers are in compliance with GAAP this will help preserve creditability with creditors and investors because it restore confidence with external customers that the medical center financial reports precisely depict its financial standing.

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