Assets

Assets can broadly be described as resources owned by a company used to produce future benefits. Ownership of an asset can generally be obtained through the use of internal equity in the company or through external financing. Assets are generally categorized as either short term or long term. Short-term assets represent resources that will be converted into cash within one year from the balance sheet date. The balance sheet date represents a snapshot of the financial position of a company at a certain point in time. Long-term assets represent resources intended to be used for the benefit of the company at a point in time beyond 12 months from the balance sheet date.

Within each of the two categories, short-term assets and long-term assets, various classes of assets are commonly found on a company's balance sheet. Several types of short-term assets are typically found in most health care organizations: cash and cash equivalents, marketable securities, accounts receivable, inventory, and prepaid expenses.

Cash and Cash Equivalent—Cash provides the basis for measuring all financial statement accounts. Cash can be maintained on site at the company, for example in a petty cash fund (small amounts of cash to cover day-to-day needs). In addition, cash can be maintained by an external financial institution. Even though the cash is not physically located at the company, authorized company personnel can initiate transactions with the external financial institution to use the cash resources. Cash equivalents are highly liquid instruments or instruments that can easily be converted into cash.

Marketable Securities—Marketable securities are investments that can include stocks and bonds in other publicly traded companies. Not all investments in stocks and bonds qualify as short-term marketable securities. To qualify as a marketable security, the company must intend to convert the investment into cash within one year from the balance sheet date. Company management generally bases this intent on the company's day-to-day cash needs.

Accounts Receivable—Accounts receivable arise from a company selling its products or services to customers who do not immediately pay cash. For most health care organizations, accounts receivable arise from the treatment of a patient and the related billing of the patient or the patient's third-party insurer. Health care providers such as hospitals must establish the gross value of the accounts receivable at the prevailing charge for each service rendered. However, given the nature of third-party payer contracts, the expected collections for those services are usually significantly less[Page 32] than established charges. As a result, management must estimate the allowance for uncollectible amounts because of contractual arrangements. Accounts receivable appear on the balance sheet during the time period between the recognition of revenue and the receipt of the related cash payment. In addition, the likelihood is inevitable of some accounts receivable not being collected as a result of bad debt. Companies account for these expected bad debts by using an “allowance for bad debts” account.

Inventory—Inventory most often represents items held for sale or use in producing goods and service in the ordinary course of business. Inventory is most common in manufacturing and retail companies, whose operations involve selling inventory as part of their operations. Inventory in most health care organizations includes medical supplies and pharmaceuticals used in treating patients.

...