Part II Record Financial Operations Chapter 5 Expenses Outfl

Part Ii Record Financial Operationschapter 5 Expenses Outflowove

Part II: Record Financial Operations CHAPTER 5: EXPENSES: (OUTFLOW) Overview: The Distinction Between Expense and Cost • Expenses are expired costs that have been used up, or consumed, while carrying on business. • Expense in the broadest sense includes every expired (used up) cost that is deductible from revenue. Overview: The Distinction Between Expense and Cost • “Cost†is the amount of cash expended in consideration of goods or services received (or to be received). (or property transferred, services performed, or liability incurred) • Costs can either be expired or unexpired. • Expired costs are used up in the current period and are matched against current revenues. • Unexpired costs are not yet used up and will be matched against future revenues.

Overview: The Distinction Between Expense and Cost • Confusion also exists over the term “cost†versus the term “chargesâ€. • Charges are revenue, or inflow • Costs are expenses, or outflows • Charges add; costs take away. Overview: Confusion Over Other Terminology Disbursements for Services • Disbursements for services represent an expense stream (an outflow) • Disbursements for services can trigger payment either: – when the expense is incurred; or – after the expense is incurred. Disbursements for Services • Payment when the expense is incurred does not require the expense to enter the Accounts Payable account. • Payment after the expense is incurred requires the expense to be recorded in the Accounts Payable account. • It is then cleared from Accounts Payable when payment is made.

Grouping Expenses for Planning and Control • Grouping by Cost Center • One form of responsibility center. • Study examples in Exhibits 5-1 and 5-2. Exhibit 5–2 General Services and Support Services Cost Centers Grouping by Diagnoses and Procedure • Beneficial because is matched costs and common classifications of revenues • Study examples in Exhibits 5-3, 5-4, 5-5 & Table 5-1 Exhibit 5–5 Example of Hospital Departmental Costs Classified by Diagnoses, MDC, and DRG Table 5–1 Example of Radiology Department Costs Classified by Procedure Code • By care settings recognizes different sites where service is delivered • Care settings were discussed in the previous chapter. Grouping by Care Settings • By service lines would be used for grouping costs if revenues were divided by service line. • Service lines were discussed in the previous chapter.

Grouping by Service Lines • Distinguishes projects that posses their own objectives, funding, and indicators. • Study the example in Exhibit 5-6. Grouping by Programs Exhibit 5–6 Program Cost Center: Southside Homeless Intake Center Cost Reports As Influencers Of Expense Formats • Since the mid-1960s Annual Cost Reports are required by the Medicare Program and the Medicaid Program. Cost Reports As Influencers Of Expense Formats • The arrangement of costs into “Cost Centers†(on the cost report) has strongly influenced the arrangement of expense line items in many health care information systems. Grouping Expenses by Cost Center: Example • Example: A nursing home may consider the Admitting Department as a cost center. • In this case, the expenses grouped under the Admitting Department may include: – Administrative and Clerical Salaries – Admitting Supplies – Dues – Periodicals and Books – Employee Education – Purchased Maintenance Grouping Expenses by Cost Center: Practice Exercise 5-I • The Metropolis Health System groups expenses for the Intensive Care Unit into its own cost center. Lab and Laundry expenses are likewise grouped into their own cost centers. Required: 1. Setup a worksheet with columns across the top for three cost centers: Intensive Care Unit; Lab; and Laundry. 2. Indicate the appropriate cost center for each of the following expenses: see following slide.

Grouping Expenses by Cost Center: Practice Exercise 5-I Drugs Requisitioned Pathology Supplies Detergents and Bleach Nursing Salaries Clerical Salaries Uniforms (for Laundry Aides) Repairs (parts for microscopes) Laundry X X X Laboratory X X X Intensive Care Unit X X X

Grouping Expenses by Cost Center: Assignment 5-1 • The Metropolis Health System’s Rehabilitation and Wellness Center offers outpatient therapy and return-to-work services plus cardiac and pulmonary rehabilitation to get people back to a normal way of living. • The Rehabilitation and Wellness Center expenses include the following: see following slide. • Grouping Expenses by Cost Center: Assignment 5-1 Nursing Salaries Physical Therapist Salaries Occupational Therapist Salaries Cardiac Rehab Salaries Pulmonary Rehab Salaries Patient Education Coordinator Salary Nursing Supplies Physical Therapist Supplies Occupational Therapist Supplies Cardiac Rehab Supplies Pulmonary Rehab Supplies Training Supplies Clerical Office Supplies Employee Education Administrative/Clerical salaries Administrative X X Training X X X Cardiac Pulmonary X X X X X X X Physical/Occupational Therapy Rehab X X X X X X X

Paper For Above instruction

The provided materials encompass critical aspects of financial operations within healthcare settings, especially focusing on expenses, their classification, grouping, and recording. The core objective is to understand how healthcare organizations manage and report expenses considering various dimensions such as cost centers, diagnoses, procedure types, services, and care settings. This understanding facilitates efficient planning, control, and compliance with regulatory requirements, notably Medicare and Medicaid cost reporting mandates.

At the outset, the distinction between expenses and costs is fundamental. Expenses represent used-up or expired costs necessary for ongoing operations, deductible against revenues in the period they are incurred. They differ from costs, which are the expenditures made to acquire goods or services, and can be either expired or unexpired. Expired costs are recognized within the current accounting period, while unexpired costs are deferred for future periods. Clarifying terminology ensures precise financial reporting—expenses are outflows, reducing revenue, whereas charges or inflows increase revenue.

Understanding disbursements for services is vital, where payments can occur at different times relative to incurring expenses, influencing how transactions are recorded. An expense incurred but not yet paid must be captured in accounts payable until settled. This leads to an effective practice of matching expenses with revenues, supporting accurate financial statements and operational assessments.

Cost grouping strategies are essential for planning, analysis, and control. Grouping by cost centers, such as departments or service functions like laboratory or laundry, helps allocate expenses accurately and assign responsibility. Exhibits and practice exercises demonstrate setting up worksheets reflecting departmental expenses, like ICU or laboratory costs, promoting clarity in financial management. Additionally, organizations may group expenses by diagnoses, procedures, or care settings to align costs with revenue streams, supporting operational efficiency and strategic planning.

Further, grouping by service lines and programs provides insights into specific projects, service objectives, and funding sources. For example, cost reports from Medicare or Medicaid influence how organizations compile expense data, emphasizing the importance of standardized formats for compliance and comparable analysis.

The review also encompasses the theoretical foundation of assets, liabilities, and net worth, essential elements of financial statements. Assets are resources with future benefits; liabilities are obligations, and net worth reflects ownership interests. The traditional accounting equation—assets equal liabilities plus net worth—underpins all financial reporting. Recognizing how these components vary among for-profit, nonprofit, and government entities enhances understanding of their financial positioning and reporting standards.

Overall, mastery of these concepts enables effective financial management in healthcare organizations, ensuring regulatory compliance, operational efficiency, and strategic planning. This comprehensive understanding is critical for professionals seeking to excel in healthcare finance and accounting.

References

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