Income Statement Evaluations

School: Kennesaw State University - Course: NR 715 - Subject: Accounting

Select two different types of HCOs and consider the most positive and most negative effects of using the cash versus accrual accounting method for the business. Keeping accurate financial records is becoming a need in the healthcare industry. The United States Department of Health and Human Services and the National Institutes of Health are two examples of American healthcare agencies that engage in medical care accounting. Using cash accounting or accrual accounting comes with both benefits and drawbacks for the two companies. To begin, the cash basis of accounting only records revenues when actual money is received. All expenditures are not recognized until cash is actually fully paid out. The convenience of cash accounting comes from the fact that it requires no record-keeping beyond the actual cash inflow and outflow. Using cash method also makes it simpler to track the money coming in and going out of the stated HCOs. The cash accounting method has a potential flaw in that it overstates the financial health of businesses who are flush with cash yet have enormous payables compared to their current assets and sales (Goel, 2016). Whenever companies are operating at a loss, investors might mistakenly believe that they are profitable. Secondly, there is accrual accounting approach. Using this method, money is tallied as soon as it is earned. In most cases, income is recorded before any monetary transactions take place. Accrual accounting differs from cash accounting because it recognizes revenue upon delivery of goods or services to consumers rather than upon receipt of payment. Services and things purchased are reported as costs even though no dollars was ever exchanged for them (Eulner & Waldbauer, 2018). The approach's advantage is that it provides a comprehensive picture of a company's financial performance, especially over the long term, by including both accounts payable and receivable. This is because under accrual accounting, all income and all costs are recorded in their whole whenever they are generated and expended, respectively.

INCOME STATEMENT EVALUATIONS3 Applying accrual accounting has its drawbacks, among which is that it fails to monitor income stream and might not account for medical institutions with significant financial problems in the near run, although seeming successful in the long run. Second, the accrual method may be very difficult to implement because of the need to account for things like unearned earnings and prepaid expenses (Eulner & Waldbauer, 2018).