During a specific accounting period, a hospital has earned $1,500,000 in revenues and consumed $600,000 in resources. Consider the following three scenarios. In scenarios A and B, cash basis of accounting method is followed. In scenario C, accrual basis of accounting rules are followed.
Scenario A – management wants the financial statements to show high profit, 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 low profit, maybe in order to encourage donations. It discourages patients and 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, the financial statements report revenues, $1,500,000, when revenues are earned; 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 to management’s manipulation and how the accrual basis of accounting overcomes the disadvantages of the cash basis of accounting.
- When looking at a capital investment into a project for an organization, management needs the board’s approval for the funds. Because of this need for approval, there is sometimes a tendency to overstate revenue and understate expenses associated with the project. Why do you feel that management would overstate revenue and understate expenses? What are the consequences of doing this?
I need 2-3 paragraphs, APA, 2-3 in-text citations, 2-3 references