This document discusses unique financial accounting rules that apply to not-for-profit and healthcare organizations. It explains that not-for-profits must disclose donor-imposed restrictions and provide statements of functional expenses. Healthcare organizations must report revenues net of contractual allowances and charity care. The document also discusses rules around charity care, noting that hospitals must provide free or reduced-cost care to those below certain income thresholds defined by states in order to maintain not-for-profit status. Examples of charity care rules from Washington, New Jersey, and California are provided.

1. 1
4. Describe the financial approach to strategic healthcare
planning, considering how managers can
participate most effectively in this process.
4.1 Explain the purpose of the activity statement and statement
of cash flows.
4.2 Discuss the process of recording financial information and
generating a balance sheet.
4.3 Discuss various asset categories, including cash, marketable
securities, accounts
receivable, inventory, prepaid expenses, fixed assets, and
sinking funds.
Reading Assignment
Chapter 10:
Taking Stock of Where You Are: The Balance Sheet
Chapter 11:
Reporting the Results of Operations: The Activity and Cash
Flow Statements
Unit Lesson
In Unit VI, you will discover that financial reports are prepared
by organizations monthly, quarterly, and
annually, and that these reports are essential for determining the
financial health of a healthcare organization.
In order to function effectively in healthcare management, you
need a very thorough understanding of these

2. reports and what they reflect about your department and your
medical facility overall. A good portion of each
healthcare board of directors meeting is focused on reviewing
and interpreting these reports.
Financial reports help managers understand the current financial
situation of the organization and also the
financial results of its operation. They provide information not
only for management of the organization, but
also for outsiders—for people who take interest in the stability
of the organization as it strives to fulfill its
mission of patient care. Just a few of these parties include
auditors, local government officials, the state
department of health, and various accrediting agencies.
Preparation of the financial reports which will be examined by
individuals external to the organization is
referred to as financial accounting. Financial accounting
employs a process of recording financial
transactions, summarizing all of the information contained in
the transactions, and then reporting the
information in a set of standardized financial statements.
Balance Sheet
The statement of financial position (commonly referred to as the
balance sheet) is the first of the financial
statements. You need a solid understanding of the balance sheet.
A balance sheet reports the financial
position of the organization at a moment in time—often the end
of a month or end of the fiscal year. For any
specific entity, this financial document provides a highly
summarized view of its financial position at any one
point in time.
Financial statements are derived from information contained in

3. and changes to the fundamental equation of
accounting. That equation states that the assets of any entity
equal the liabilities plus the net worth of the
entity. All of financial accounting is built around that
fundamental equation. In addition, many organizations
follow a set of rules or conventions that are referred to a
Generally Accepted Accounting Principles (GAAP).
These GAAP—such as the entity, monetary denominator,
objective evidence, conservatism, going concern,
and materiality principles—help to the provide structure that
makes financial statements of different
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organizations understandable and comparable. It allows us to
compare apples and apples, not apples and
pears, when we benchmark financial statements of medical
facilities.
Statement of Changes in Equity
Balance sheets provide their readers with information about a
variety of different types of assets and liabilities
of the entry. Some of the asset categories explored in this unit
are cash, marketable securities, accounts
receivable, inventory, prepaid expenses, and fixed assets. A
variety of liability categories are also discussed,
including both short-term payables and long-term debt. The
residual value of the entity when liabilities are
subtracted from assets represents the ownership or equity value
of the entity. This may be called net worth,

4. owner’s equity, net assets, fund balance, or a variety of other
names that convey the equity concept, as
appropriate for the specific type of entry.
Activity Statement
Unit VI goes on to discuss reporting the results of operations.
This is achieved by generating an activity
statement (also known as income statement) and statement of
cash flows. Unlike the balance sheet, these
statements report on what has happened over a period of time,
rather than just disclosing the financial
position of the organization at one specific point in time. The
activity statement compares the entity’s
revenues and other support with its expenses for a period of
time, such as a fiscal year.
The activity statement, probably more than any other document
which reaches the board of directors, gets
intense scrutiny. It is the activity statement which shows us
whether the organization has black ink for the
period under consideration, meaning that it generated a profit,
or whether it generated red ink—showing a
loss.
Cash Flow Statement
The cash flow statement is also very important; it looks at
where the organization obtained its cash and where
it spent cash during a particular period of time, a month, a
quarter, or a year. The focus is not only on how
much cash came and went, but also on the sources and uses of
cash. When we consider all four financial
statements together, we get a clear picture of when the
healthcare organization is financially, where it has
been over recent periods, and where it is headed. Together,

5. these statements provide the user with a sense
of how well the organization has done over the period of time
covered by the statements. Importantly, these
statements also tell us a great deal about what the organization
can realistically accomplish over future
periods.
e organization?
update equipment in crucial areas like
radiology, laboratory, respiratory therapy, or intensive care?
One thing that you need to truly understand is that there was a
day in American healthcare when the financial
statements were largely left to the CFO, CEO, and accounting
staff. Those days are gone. Managers at all
levels are expected to be able to work with financial statements,
participate in their creation, and interpret
them as tools for managing their departments. American
healthcare today requires managers who really
understand what is going on with their departments’ financial,
and adapt accordingly on a month-to-month
basis. The department director may be a nurse first and
foremost, but he or she will very likely need a Master
in Business Administration (MBA) or Master in Healthcare
Administration (MHA) in order to do a great job of
leading his or her department. That is why so many clinical
managers now find themselves going back to
school online, in courses just like this one, to increase their
skills in financial management and analysis.
Conclusion
By the end of this unit, you will have a much better
understanding of financial statements. You will be able to

6. read the:
profit and loss statement;
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activities,
investing activities, and financing
activities; and
of retained earnings.
As mentioned in previous unit lessons, a key aspect of
healthcare finance today, from the department director
perspective, is being able to speak the language of business.
Unit VI is very instrumental for you in terms of
sharpening your understanding of this language—the language
of healthcare finance!
1
2. Explain variable and fixed costs, direct and indirect costs,

7. and cost accounting principles for
healthcare services or processes.
2.1 Evaluate unique rules of financial accounting for not-for-
profit and healthcare organizations.
2.2 Discuss fund accounting, including the typical types of
funds, interfund transactions, and the
current use of fund accounting by not for-profit organizations.
5. Discuss change, innovation, and learning as they relate to the
financial management of health care
organizations.
5.1 Discuss special rules related to the recognition and
reporting of donated goods and services.
5.2 Explain the treatment of investments by not-for-profit and
healthcare organizations on
financial statements.
Reading Assignment
Chapter 12:
Unique Aspects of Accounting for Not-for-Profit and Health
Care Organizations
Chapter 13:
Unique Aspects of Accounting for State and Local
Governments—Part I: The Recording Process
Chapter 14:
Unique Aspects of Accounting for State and Local
Governments—Part II: Reporting Financial Results
Unit Lesson
The general principles of accounting are broadly applied to all

8. types of organizations, and as you learned last
unit, the Generally Accepted Accounting Principles (GAAP)
should prevail as we prepare financial statements.
However, there are many unique aspects of financial accounting
for healthcare, not-for-profit, and
governmental organizations. Unit VII considers unique financial
issues for not-for-profit and healthcare
organizations in particular. You will learn that there are certain
unique aspects of managing and financial
reporting when healthcare services are involved. This relates, at
least in part, to the fact that healthcare in our
nation began as a charitable undertaking, with medical facilities
often being operated by churches and other
charitable organizations.
Not-for-profit organization financial statements contain a
number of important distinctions from the statements
issued by for-profit organizations. For example, donor-imposed
restrictions on net assets must be disclosed in
the statement of financial position (balance sheet). A statement
of functional expenses must be provided for
voluntary health and welfare organizations. A specific set of
conditions must be met for donated services to
be recorded and reported on the financial statements. All of this
is essential due to the not-for-profit status of
the organization. Failure to comply with all of these very
specific financial reporting rules could lead to the loss
of not-for-profit status for the organization. That would mean
that the organization must begin paying taxes.
Healthcare organizations must report their revenues net of
contractual allowances and charity care. Bad
debts must be reported as an expense rather than as a revenue
offset. Charity care is not included as a bad
debt expense or revenue offset. The only place that it shows up
is in the notes which accompany the financial

9. statements. You need to very clearly understand charity care
and what that means for healthcare facilities.
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Charity Care
Many U.S. states provide charity care for patients who meet
certain financial requirements. This obligation on
behalf of the hospital is part of an ongoing requirement to hold
not-for-profit status in the state, and it is
mandated, not optional. Charity care must be provided if the
hospital wishes to retain its not-for-profit status,
ability to receive tax-deductible donations, and avoid paying
taxes, so getting this part right is extremely
important to hospitals. Failure to keep track of charity care
responsibilities on an annual basis can quickly
result in reversal of a healthcare facility’s not-for-profit status
and substantial new tax burdens for future fiscal
years.
Charity care specifically refers to a hospital’s practice of
waiving or reducing fees charged to patients who
have incomes which are too low to afford the full cost of the
medical care provided. This concept came about
through the Hill-Burton Act of 1946, which funded the
construction of many community hospitals across our
nation. It was immediately after World War II, and America
needed two things simultaneously: it needed more

10. and better hospitals to provide care for our rapidly growing
population, and it needed jobs for thousands of
returning servicemen. The Hill-Burton Act served to address
both needs. The simple concept of Hill-Burton is
if an American community wanted to receive federal funds to
build a hospital for its local citizens, the
community would also be agreeing to the rules for charity care
which appeared in the Hill-Burton Act. As with
most federal funding scenarios, there were strings attached to
accepting Hill-Burton funding.
The specific requirements for providing charity care differ
considerably from state to state, and they are
defined by a variety of specific criteria. However, in all cases,
hospitals that desire not-for-profit status, and all
the benefits that come with it, must provide charity care for the
community. Let us take a few specific
examples here.
Washington: A true national leader and innovator in this area is
the state of Washington. The Washington
State Department of Health mandates that not-for-profit
hospitals provide charity care to patients who cannot
afford to pay the full cost of care. The law specifically defines
eligibility for charity care as any individual
whose income is less than 100% of the federal poverty level
(FPL), or any family whose combined income is
less than 200% of the FPL. Also, in order to qualify for charity
care, the patient must be ineligible for any form
of public health insurance, such as the Medicaid program or
Medicare program. If the patient is eligible for
one of these forms of public health insurance, then the hospital
must assist him or her in applying for
coverage. Absent such eligibility, the charity care rules apply.
Under Washington state laws, reduced fees for hospital care for

11. families are provided on a sliding scale basis,
but individuals who qualify for charity care must be treated free
of charge. It is a violation of law for the
hospital to charge an individual for services if he or she
qualifies for charity care.
Additionally, Washington requires that a hospital must notify
any patient when he or she is eligible for charity
care. The charity care obligation is not based simply upon
waiting for the patient to ask; it must be a proactive
effort of the hospital to meet the charity care program
requirements and educate patients about their eligibility.
The state of Washington is generally considered to be among
the leaders nationally in promoting the
availability of charity care for patients who truly need it. Their
model has been adopted by several other states
over recent years. You will see similarities among the other
states which we will use as examples here.
New Jersey: The state of New Jersey permits patients to receive
free or reduced price hospital care for what
it deems to be necessary medical care. The precise definition of
necessary medical care varies significantly
from state to state, with the New Jersey definition being broader
than that in many other states. To receive
charity care in New Jersey, a patient can either have no health
insurance or partial health insurance
coverage. However, the patient cannot qualify for any kind of
public health insurance program such as
Medicare or Medicaid. The patient must also meet the New
Jersey income requirements. If the patient earns
less than 200% of the federal poverty level (FPL), he or she will
quality for charity care—no charges for
services. As the percentage of the FPL increases in 25%
increments, the percentage of costs charged to the

12. patient increases by 20%.
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California: The state of California also has laws which mandate
charity care in hospitals for patients who do
not have sufficient insurance coverage to pay the full hospital
bill. Patients who do not earn enough money to
cover the full cost of care can benefit from this program. In
California, a patient must earn only a certain
percentage of the federal poverty level (FPL) in order to qualify
for no cost or discounted hospital care. This
percentage actually varies from city to city, and hence hospital
to hospital, within the state. That situation is
unique to California. Most states establish eligibility criteria
that apply across the state, not varying from city to
city.
Conclusion
Overall, you will find that the principles of GAAP do apply to
healthcare organizations, but there are a few
wrinkles. Charity care, and the accounting for that care, is
certainly an example. Over recent years, more than
a few hospitals have found themselves in trouble over their
handling of charity care, so it is extremely
important for the hospital CFO, CEO, and mangers to
understand this issue.

13. Suggested Reading
The resources below expand upon the material in the unit
lesson.
Alliance for Advancing Nonprofit Health Care. (n.d.). Basic
facts and figures on nonprofit health care.
Retrieved from http://www.nonprofithealthcare.org/resources/
Washington State Department of Health. (n.d.). Charity care in
Washington hospitals. Retrieved from
http://www.doh.wa.gov/DataandStatisticalReports/Healthcarein
Washington/HospitalandPatientData/H
ospitalPatientInformationandCharityCare/CharityCareinWashing
tonHospitals