Financial Statements: Balance Sheet, Income Statement, Depreciation, GAAP, Accounts Payable and Receivable
Unit 1: Financial Management. Lesson 4 of 60 in CHTM Academy.
You are invited to a leadership meeting where the finance officer walks through the hospital's statements before the capital list is discussed. Nobody will explain the terms to you. Your ten-million-dollar inventory is sitting inside one of those statements, and the way it is carried there decides how your replacement request is heard.
The two statements a manager must recognize
Statement Covers Lines Where equipment shows up
Balance sheet one day assets, liabilities, equity an asset, at book value
Income statement a period revenue, expenses, net income depreciation and service
expenseThe balance sheet is a snapshot on a single date, and it balances: assets equal liabilities plus owner's equity. Your equipment sits on the asset side at its book value. The income statement, also called the profit and loss statement, covers a period of a month, a quarter, or a full year: revenue minus expenses equals net income. Your department touches it through salaries, parts, contracts, and the depreciation of the assets you asked for.
Cash flow deserves one paragraph. The cash flow statement tracks money in and money out over a period, split into operating, investing, and financing. It exists because reported profit is not money in the bank. A hospital can show net income and still have no cash this quarter for your capital item, and that is a real answer rather than an excuse.
Depreciation, and why a fully depreciated device still runs
Depreciation spreads a capital item's cost across its useful life. Straight-line is the common method: (cost minus salvage value) / useful life, per year. A $1,000,000 system over a ten-year useful life with no salvage depreciates $100,000 a year. Book value = cost minus accumulated depreciation, so after three years that system is carried at $700,000.
Here is the trap. Book value is an accounting position, not a condition report. A device that is fully depreciated has a book value of zero and may still be accurate, safe, supported, and years from replacement. Another device may be half depreciated and already unsupportable. Replacement is argued on support, failure trend, parts availability, and clinical need, never on the depreciation schedule alone. The schedule matters in one direction only: disposing of an asset still being depreciated writes off the remaining book value, which is a hit finance must agree to in advance.
GAAP and why the department follows it
GAAP stands for generally accepted accounting principles: the standards, conventions, and rules accountants follow when they record transactions and prepare statements. A manager does not apply GAAP personally, but a manager lives inside it. It is why a part cannot be expensed in a convenient month, why capital and expense are not interchangeable, and why the auditor can ask to see the receiving document behind a number. Consistent rules are what make one year comparable with the next.
Payables, receivables, and business activity reports
Accounts payable is what the hospital owes its vendors, and your unpaid service invoices and parts orders sit there. Your part in it is real: you approve the invoice, confirm the work was done and documented, and withhold approval when the service report never arrived. Accounts receivable is what the hospital is owed, and it holds the revenue from any service your department sells outside, plus the chargebacks billed to clinical cost centers. A business activity report is the periodic summary of what the department did and what it cost, written for leadership: volumes, labor, cost by category, and the trend. It is how a non-financial department shows its work in financial language.
Financial Statements: Balance Sheet, Income Statement, Depreciation, GAAP, Accounts Payable and Receivable, explained slowly
A small balance sheet
This is a simplified hospital balance sheet on the last day of a fiscal year. It balances, because it must: assets equal liabilities plus equity.
ASSETS LIABILITIES
Cash and short-term investments 42,000 Accounts payable 31,000
Accounts receivable, net 88,000 Accrued salaries and
Inventories and supplies 14,000 benefits 19,000
Property, plant and equipment Current portion of debt 12,000
Land and buildings 310,000 Long-term debt 186,000
Medical equipment, at cost 240,000 Total liabilities 248,000
Less accumulated
depreciation (138,000) EQUITY
Net equipment 102,000 Net assets 308,000
Total assets 556,000 Total liabilities
and equity 556,000Find your inventory. Medical equipment is carried at $240,000 of original cost with $138,000 of accumulated depreciation against it, so its net book value is $102,000. That $102,000 is not what the equipment is worth, not what it would cost to replace, and not a statement about how much life it has left. It is cost minus the depreciation taken so far, and nothing else.
The income statement for the same year
Net patient service revenue 742,000 Other operating revenue 18,000 Total operating revenue 760,000 Salaries, wages and benefits 418,000 Supplies and drugs 152,000 Purchased services and maintenance 64,000 Depreciation and amortization 41,000 Interest 9,000 Other operating expenses 58,000 Total operating expenses 742,000 Operating income 18,000
Three lines on this statement are yours. Salaries and benefits carries your staff. Purchased services and maintenance carries your contracts and vendor labor. Depreciation carries the capital items you asked for in previous years, which is the quiet reason a capital committee is cautious: every approval it grants becomes an expense line on this statement for a decade.
Depreciation and book value, worked
A $1,000,000 system, ten-year useful life, no salvage value Annual depreciation (1,000,000 - 0) / 10 100,000 per year End of year 1 book value 1,000,000 - 100,000 900,000 End of year 3 book value 1,000,000 - 300,000 700,000 End of year 10 book 1,000,000 - 1,000,000 0 value Disposed in year 7 remaining book value written off 300,000
The year-seven line is the one that reaches a manager. Replacing that system in year seven costs the hospital the new purchase plus a $300,000 write-off of remaining book value, and finance must agree to the write-off before the old asset moves. A fully depreciated device in year eleven, by contrast, can be disposed of with no write-off at all, which is occasionally the cheapest year to replace something.
Payables, receivables, and GAAP in one page
Term What it is Your part in it
Accounts payable what the hospital owes its approve the invoice only when
vendors the work is done and the
service report is in the CMMS
Accounts what the hospital is owed chargebacks to clinical cost
receivable centers and outside service
billing originate with you
Cash flow cash in and out, split into explains why an approved
statement operating, investing, capital item still waits
financing
GAAP the standards accountants why capital and expense are
follow to record and report not interchangeable and why
the auditor wants the
receiving document
Business activity the periodic summary of what you write it: volumes, labor,
report the department did and cost cost by category, and trendWhat to memorize
Balance sheet one day; assets = liabilities + equity Income statement a period; revenue - expenses = net income Cash flow cash in and out; profit is not cash Straight-line (cost - salvage) / useful life, per year Book value cost - accumulated depreciation Fully depreciated book value zero; says nothing about condition or life Payable/receivable owed to vendors / owed to the hospital