Question Description
Cash Basis of Accounting
During a specific accountingperiod, a hospital has earned $1,500,000 in revenues and consumed$600,000 in resources. Consider the following three scenarios. Inscenarios A and B, cash basis of accounting method is followed. Inscenario C, accrual basis of accounting rules are followed.
Scenario A – management wants the financial statements to show highprofit, it delays paying the bills until after the accounting period,although full payment of $1,500,000 is collected.
Scenario B – management wants the financial statements to show lowprofit, maybe in order to encourage donations. It discourages patientsand third-party payors from paying until after the accounting period.All the bills, $600,000, get paid on time.
Scenario C – according to accrual basis of accounting method, thefinancial statements report revenues, $1,500,000, when revenues areearned; and expenses expended to generate those revenues of $600,000,when resources are used.
|
Reported records |
Scenario A |
Scenario B |
Scenario C |
|
Revenues |
$1,500,000 |
$0 |
$1,500,000 |
|
Expenses |
$0 |
$600,000 |
$600,000 |
|
Profit |
$1,500,000 |
($600,000) |
$900,000 |
- Discuss how the cash basis of accounting is vulnerable tomanagement’s manipulation and how the accrual basis of accountingovercomes the disadvantages of the cash basis of accounting.
- When looking at a capital investment into a project for anorganization, management needs the board’s approval for the funds.Because of this need for approval, there is sometimes a tendency tooverstate revenue and understate expenses associated with the project.Why do you feel that management would overstate revenue and understateexpenses? What are the consequences of doing this?
1 page, 3 cited sources
Required Reading
Accounting For Management. (2013). Vertical analysis (common-size analysis) of financial statements. Retrieved from http://www.accountingformanagement.org/vertical-an…
Albrecht, C. & Albrecht, C. (2008). The nature of financial statement fraud. Internal Auditing, 23(4), 22-27.
National Health Care Anti-Fraud Association. (2016). The challenge ofhealth care fraud. Retrieved fromhttps://www.nhcaa.org/resources/health-care-anti-f…
U.S. Securities and Exchange Commission. (n.d.) Beginners’ guide to financial statements. Retrieved from http://www.sec.gov/investor/pubs/begfinstmtguide.h…
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