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1972

Hospital audit guide (1972); Industry audit guide;

Audit and accounting guide
American Institute of Certified Public Accountants. Committee on Health Care Institutions

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 AN
AICPA
INDUSTRY
AUDIT
GUIDE

Prepared by the Committee on Health Care Institutions

of the American Institute of Certified Public Accountants
 NOTICE TO READERS

This audit guide is published for the guidance of members of the

Institute in examining and reporting on financial statements of hospi-
tals. It represents the considered opinion of the Committee on Health
Care Institutions and as such contains the best thought of the profes-
sion as to the best practices in this area of reporting. Members should
be aware that they may be called upon to justify departures from
the Committee's recommendations.

Committee on Health Care Institutions (1971-72)

WILLARD H . ERWIN, JR., Chairman BERNARD H . R O S S
ADRIAN A L T E R ALVIN C . STIPA
BERNARD B A C H M A N NORRIS C . T A Y L O R , J R .
GUNTHER R . BORRIS FRED S. W E E R
A L B E R T A . CARDONE ALLAN J . WINICK
M A T T H E W P . GERAGHTY
CHARLES J . LUDWIG
G u s D E A N MANDALERIS
AICPA Staff:
ROBERT E . POWELL JOE R . FRITZEMEYER
JOHN P . QUINN STEPHEN J . GALLOPO
ROBERT F . ROSENSTIEL THOMAS R . HANLEY

The Committee expresses appreciation to Arthur Bettauer, William

Freitag, William H. Holm, Leon Kranztohr, R. Milton Laird, William
Mansfield, A. Marvin Perrin, Raymond V. Shingler, and Leroy Steinke
who served on past committees and Joseph V. Bencivenga, former
AICPA staff aide to the Committee. During their tenure, they con-
tributed significantly to the project; they also devoted their time and
effort after their committee service had been completed.
At its meeting in New York City on March 29-30, 1977, the
Accounting Standards Executive Committee—
• Agreed that municipal hospitals should follow the
accounting principles set forth in the Hospital
Audit Guide

HOSPITAL
AUDIT GUIDE

AMERICAN
INSTITUTE
OF CPAs
Copyright 1972 by the
American Institute of Certified Public Accountants, Inc.
666 Fifth Avenue, New York, New York 10019

Additional copies of this booklet may be pur-

chased from the American Institute of CPAs.
 Table of Contents
Preface v

1 Introduction 1
Classification of Hospitals 1
Accounting and Reporting Considerations 1

2 Accounting and Reporting 3

Application of Generally Accepted Accounting Principles 3
Accounting for Property, Plant, and Equipment 4
Third-Party Reimbursement—Timing Differences 5
Patient Service Revenues 5
Prior Period Contractual Revenue Adjustments 6
Donated Services, Supplies, Property, and Equipment 6
Unrestricted Gifts, Grants, and Bequests 7
Board-Designated Funds 8
Unrestricted Funds 8
Restricted Resources 8
Investment Income and Gains (Losses) 10
Pledges 10
Funds Held in Trust by Others 11
Hospitals as a Part of Other Organizations 11
Other Related Organizations 11
Reporting an Accounting Change 12

3 Auditing Procedures—General 13
Scope of Engagement 13
Preparation for the Audit 13
Statistics 14
Other Considerations 15
Management Letters 16

4 Auditing Procedures—Assets 17
Cash 17
Investments 17
 Accounts Receivable 18
Inventories 21
Property, Plant, and Equipment 22

5 Auditing Procedures—Liabilities, Deferred Revenue,

and Fund Balances 24
Liabilities and Deferred Revenue 24
Fund Balances 25
Changes in Fund Balances 26

6 Auditing Procedures—Revenues and Expenses 29

Patient Service Revenue 29
Deductions From Revenue 31
Other Operating Revenue 33
Nonoperating Revenue 34
Expenses 35

7 Financial Statements 38
Exhibit A: Sample Hospital Balance Sheet 40
Exhibit B: Sample Hospital Statement of Revenues and
Expenses 42
Exhibit C: Sample Hospital Statement of Changes in
Fund Balances 43
Exhibit D: Sample Hospital Statement of Revenues and
Expenses and Changes in Unrestricted Fund Balance
(Alternative Presentation) 44
Exhibit E: Sample Hospital Statement of Changes in
Financial Position of Unrestricted Fund 46
Sample Hospital Notes to Financial Statements 48
Schedule 1: Sample Hospital Patient Service Revenues 50
Schedule 2: Sample Hospital Operating Expenses 51

8 Independent Auditors' Reports 53

Departures From Standard Short-Form Report 53

Appendix
Glossary 56

\
 Preface
This guide is issued to assist the independent auditor in auditing
hospital financial statements that present financial position, changes in
financial position, and results of operations. Although such statements
are affected by the expanding role of third-party payors, the guide
does not set forth reporting guidelines for third-party reimbursement
purposes. References to third-party payors are made solely in connec-
tion with reporting on financial statements that present financial posi-
tion, changes in financial position, and results of operations.
In writing this guide, it was recognized that information important
to the public for interpretation of financial statements may differ from
that required by management to carry on daily operations. Nothing
herein precludes management from reporting information internally in
any manner they consider necessary to fulfill this function.
Although the guide contains a glossary of terms used in the text, the
reader may find the following publications of the American Hospital
Association helpful in understanding terminology, accounting, and cost
determinations:
Uniform Hospital Definitions (1960)
Chart of Accounts for Hospitals (revised 1966)
Cost Finding and Rate Setting for Hospitals (1968)
Internal Control and Internal Auditing for Hospitals (1969)
The Medicare Audit Guide, published by the American Institute of
Certified Public Accountants in 1969, is also helpful in providing some
background with respect to third-party reimbursement.

Committee on
Health Care Institutions
April 1972

v
 Chapter I

Introduction
Health care institutions include hospitals that provide short-
term inpatient and outpatient care, as well as institutions that
provide limited or long-term care, such as those for the mentally
ill and infirm, for the physically handicapped, for child care, and
for home care. Although some recommendations herein may be
found applicable to other types of health care institutions, this
guide applies only to hospitals.

Classification of Hospitals
Hospitals may be classified by type of control, such as:
Voluntary
Community
Religious Affiliated
Educational Institution Affiliated
Government Affiliated
Governmental
Federal
State
County
City
Proprietary (investor owned)

Accounting and Reporting Considerations

A large part of hospital services are for patients whose bills
are paid in whole or in part by third-party payors, e.g., Medicare,

1
Medicaid, Blue Cross, and private insurance carriers. Reporting
requirements of third-party payors usually influence record keep-
ing. With the adoption of cost-based formulas for reimbursement
by many third-party payors, requests for cost data supporting
charges to patients have increased significantly. Data requested
include statistics on occupancy, type of patients, nature of ill-
nesses, average length of confinement by type of ailment, and—
more important from an accounting standpoint—costs of providing
service to particular groups of patients.
Besides third-parties' need for cost data, voluntary and govern-
ment planning agencies will also need financial and statistical
data to help them in improving delivery of health services.
Further, as demand for service increases, financial support will
also increase. This will more than likely require a higher level of
accountability including more financial and statistical informa-
tion. In this connection, the American Hospital Association states
the following on page 24 of its Statement on the Financial Re-
quirements of Health Care Institutions and Services (1969):

Health care institutions have an obligation to disclose to the

public evidence that all their funds are being effectively utilized
in accordance with their stated purpose of operation. Such dis-
closure will be deemed to have been made if financial statements
are made available on request to those with a legitimate interest
in this information. These financial statements should be prepared
in accordance with generally accepted accounting principles con-
sistently applied, and should be accompanied by the stated opinion
of an independent public accountant as to their fairness.

2
 Chapter 2

Accounting and Reporting

Financial statements are designed to provide reliable and use-
ful financial information about resources, obligations, and results
of operation. This objective has been a guiding principle in the
development of authoritative literature on generally accepted ac-
counting principles, including this audit guide. In the preparation
of this guide, consideration was given to those characteristics of
hospitals that give rise to special accounting and reporting situ-
ations.

Application of Generally Accepted Accounting Principles

Since financial statements of hospitals present financial position,
changes in financial position, and results of operations, and are
increasingly being used by credit grantors, government agencies,
and the community, the Committee on Health Care Institutions
unanimously concludes that they should be prepared in accord-
ance with generally accepted accounting principles. Accordingly,
Accounting Principles Board Opinions and Accounting Research
Bulletins that are presently in effect or issued after this guide
is published should be applied in reporting on hospital financial
statements unless they are inapplicable.

Messrs. Stipa and Winick assent to the publication of the guide, but dis-
sent to the requirement that all investments be carried at cost.
Mr. Winick believes that hospitals should be permitted to carry market-
able securities at fair market value as is permitted for other types of entities,
so that the financial statements will better reflect the current financial posi-
tion of the institution and management's performance with regard to such
investments.
Mr. Stipa believes that the use of fair market value may in some cir-

3
 cumstances more properly present financial position and operating results
and that its use is more in keeping with the current philosophies of invest-
ment pooling, the recognition of unrealized gains and losses, and the total
return concept now emphasized by institutional boards and their investment
advisors. He therefore believes that the guide should permit the reporting
of investments at either cost or fair market value, at least until the issuance
of an authoritative accounting pronouncement regarding the carrying value of
investments, and the related effect of unrealized gains and losses upon the
financial statements.

Recommendations in the revised American Hospital Associa-

tion's Chart of Accounts for Hospitals (1966) are generally com-
patible with generally accepted accounting principles and this
guide. However, two recommendations in that publication pres-
ently are not in accordance with generally accepted accounting
principles:

1. Carrying property, plant, and equipment at current replace-

ment cost and basing depreciation on these values.
2. Carrying long-term security investments at current market
value.1

Accounting for Property, Plant, and Equipment

Property, plant, and equipment and related liabilities should
be accounted for as part of unrestricted funds, since segregation
in a separate fund would imply the existence of restrictions on
asset use. If limitations exist on the use of proceeds from a dis-
position of property, plant, and equipment, such limitations
should be disclosed.
Depreciation should be recognized in hospital financial state-
ments and is defined as follows:
. . . a system of accounting which aims to distribute the cost or
other basic value of tangible capital assets, less salvage (if any),
over the estimated useful life of the unit (which may be a group
of assets) in a systematic and rational manner. It is a process of
allocation, not of valuation.2

1 The accounting profession is currently studying the subject of ac-

counting for marketable securities.
2 AICPA, Accounting Research Bulletin No. 43, "Restatement and

Revision of Accounting Research Bulletins," Chapter 9, section c,

paragraph 5 (1953).

4
 If third parties reimburse hospitals for depreciation and re-
strict all or part of the reimbursement payment to replacements
of, or additions to, property, plant, and equipment, such payment
should be included in revenue in order to match this revenue
and related depreciation expense. In the statement of changes in
fund balances, the amount of the payment should be shown as
a transfer from unrestricted to restricted funds and returned to
unrestricted funds when expended.
Accumulation of funds for replacement or expansion of hospi-
tal facilities may result from a decision of the governing board
to set aside resources for such purposes. When this is the case,
these accumulations are considered to be designations of unre-
stricted fund balance and should be accounted for as appro-
priations of that balance. Provision for such designations of unre-
stricted fund balance should not be reflected as an expense in the
statement of revenues and expenses.

Third-Party Reimbursement—Timing Differences

If a hospital uses accelerated depreciation for cost reimburse-
ment purposes and a different method for financial statement
purposes, the effect of such difference should be deferred. This
will require deferring recognition of amounts received to the
extent related to accelerated depreciation claimed for reimburse-
ment but not reported in the financial statements; subsequently,
the deferred revenue should be recognized in the years when
the effect of the timing difference is reversed. If depreciation does
not enter directly into reimbursement (as in negotiated contracts
or in contracts with rates containing factors other than cost),
timing differences may not arise; accordingly, it will not be nec-
essary to use deferral accounting as recommended above.
In other instances where items are accounted for in different
periods for reimbursement and financial reporting purposes (e.g.,
pension costs and vacation pay), the effect of the resulting timing
differences should be shown in the financial statements.

Patient Service Revenues

Patient service revenues should be accounted for at established
rates, regardless of whether the hospital expects to collect the

5
full amount. Such revenues should also be reported on an accrual
basis in the period during which service is provided; other ac-
counting methods, such as the "discharge method,"3 are not
acceptable.
Charity allowances, other arrangements for providing service
at less than established rates, and the provision for uncollectible
accounts should be reported either separately from gross revenues
under "deductions from gross revenues" or by some other dis-
closure. Allowances of this type should also be accounted for on
an accrual basis.

Prior Period Contractual Revenue Adjustments

There may be a difference each year between final settlement
and amounts accrued at the end of a prior reporting period for
retroactive cost reimbursement settlements. Since such accruals
are generally susceptible of reasonable estimation, these differ-
ences usually should be included in the statement of revenues
and expenses as an adjustment to appropriate allowance ac-
counts. Differences should not be treated as prior period adjust-
ments unless they meet the criteria set forth in paragraph 23 of
Accounting Principles Board Opinion No. 9, "Reporting the Re-
sults of Operations," or are deemed to result from an error as
indicated in APB Opinion No. 20, "Accounting Changes."

Donated Services, Supplies, Property, and Equipment

Many hospitals receive donated services of individuals. Fair
value of donated services should be recorded when there is the
equivalent of an employer-employee relationship and an objective
basis for valuing such services. The value of services donated by
organizations may be evidenced by a contractual relationship
which may provide the basis for valuation.
Donated services are most likely to be recorded in a hospital
operated by a religious group. If members of the religious group
are not paid (or are paid less than the fair value of their serv-

3 The "discharge method" recognizes revenue when the patient is

discharged; no recognition is given to revenue accruing for services
to patients not yet discharged.

6
ices), the lay-equivalent salaries (or the difference between lay-
equivalent salaries and salaries paid) should be reported as ex-
pense with the credit to nonoperating revenue.
Donated medicines, linen, office supplies, and other materials
which normally would be purchased by a hospital should be
recorded at fair market value and reported as other operating
revenue.
Donations of property and equipment should be recorded at
fair market value at the date of contribution in the unrestricted
fund balance, unless designated for endowment or other restricted
purposes.

Unrestricted Gifts, Grants, and Bequests

Gifts, grants, and bequests that are not restricted by donors
are subject to designation by the governing board and should
be reported as nonoperating revenue; these items should not be
credited directly to fund balances. Receipt of such unrestricted
contributions may be an ordinary, normal, and recurring source
of revenue on which some hospitals depend for continued opera-
tions. Since such revenue is available for the same uses as
patient revenues, consistent presentation requires the reporting of
these resources in the statement of revenues and expenses.
Frequently, unrestricted contributions are used in support of
free care, education, research, and other expenses. In order to
match expenses with the related revenues, these contributions
should be included in the statement of revenues and expenses.
While unrestricted contributions may be used for the purchase
of property, plant, and equipment, it should be recognized that
other revenues likewise may be used for such capital purposes.
Further, it must be presumed that if the donor wished to restrict
his contribution as an addition to the permanent capital of the
hospital, such as a gift for replacement of property, plant, and
equipment or an endowment, he would have done so when donat-
ing the funds. In the absence of such restriction, the governing
board has no obligation to maintain such contributions as part of
the permanent capital of the hospital. Any action of the governing
board appropriating these contributions does not alter this treat-
ment; rather, such action is a designation of the unrestricted fund
balance.

7
 Grants and subsidies from governmental or community agen-
cies may be given for general support of the hospital. Ordinarily,
these items should be shown as nonoperating revenue. However,
where the grantor specifies that this revenue is to be used for
indigent care, it should be accounted for as a specific purpose
gift (see Restricted Resources, below) and offset against allow-
ances and uncollectible accounts when used.
When restrictions on term endowment funds expire, the re-
leased endowment should be reflected as nonoperating revenue
in the statement of revenues and expenses.

Board-Designated Funds
Unrestricted resources may be appropriated or designated by
the governing board for special uses. These resources may origi-
nate from unrestricted gifts or previously accumulated income.
If the governing board appropriates resources in this manner, it
should be recognized that the board nevertheless has the author-
ity to rescind its action. For this reason such appropriations
should be accounted for as part of unrestricted funds. Disclosure
of board designations should be made in the financial statements.
Board-designated funds should be reported separately from
donor-restricted funds. The term "restricted" should not be used
in connection with board or other internal hospital appropria-
tions or designations of funds.

Unrestricted Funds
All unrestricted resources in the balance sheet should be shown
under the "unrestricted" caption (as illustrated in Exhibit A,
pages 40 to 41) or otherwise disclosed, so the reader will not be
misled as to resources available at the discretion of the governing
board. A total of all unrestricted fund balances should be set
forth.

Restricted Resources
Many hospitals receive, from donors and other third-parties,
gifts, bequests, and grants that are restricted as to use. These

8
generally fall into three categories: (1) funds for specific operat-
ing purposes, (2) funds for additions to property, plant, and
equipment, and (3) endowment funds.
Funds for specific operating purposes consist of donor-restricted
resources and should be accounted for in a restricted fund or as
deferred revenue in the unrestricted fund. These resources should
be reported as "other operating" revenue in the financial state-
ments of the period in which expenditures are made for the pur-
pose intended by the donor.
Resources restricted by donors for additions to property, plant,
and equipment are considered as contributions to the permanent
capital of the hospital. Accordingly, these resources should be
included in the restricted fund balance. A transfer of resources
from restricted fund balance to unrestricted fund balance should
be shown in the financial statements for the period in which
expenditures are made for the purpose intended by the donor.
Endowment resources include both pure endowment funds
(the principal of which may not be expended by the governing
board) and term endowment funds (the principal of which may
be expended upon release of the prohibition on expenditure of
principal). Upon receipt, both types of endowment funds should
be accounted for as restricted funds.
With respect to term endowment funds, footnote disclosure
should be made of pertinent information such as the term of the
endowment and the purposes for which the funds may be used
during the term. When term endowment funds become available
to the governing board for unrestricted purposes, they should
be reported as "nonoperating revenue"; if these funds are re-
stricted, they should be shown as a transfer to specific purpose
or other restricted funds and accounted for as restricted funds.
Each restricted resource should be accounted for in accordance
with instructions of the party placing restrictions on the resources.
Restrictions on many resources are such that the funds can be
grouped for reporting purposes even though they may require
separate accounting in the records. Generally, restricted resources
should be grouped for reporting purposes in the three categories
discussed above.
Other examples of restricted resources include student loan,
annuity, and life income funds.

9
Investment Income and Gains (Losses)
The statement of revenue and expenses should include income
from investment of board-designated and other unrestricted
funds; unrestricted income from endowment funds; and realized
gains (or losses) on sale of investments of board-designated funds
or other unrestricted funds. Unrealized gains or losses should not
result in adjustment of financial statements, except for declines in
value that result from an other than temporary impairment.
Realized gains (or losses) on sale of investments of endow-
ment funds should be added to (or deducted from) endowment
fund principal unless such items are legally available for other
use or chargeable against other funds. Investment income of
these funds should be accounted for in accordance with donors'
instructions, i.e., as resources for specific operating purposes if
restricted, or nonoperating revenue if not.
Income and net realized gains on investments of restricted
funds, other than endowment funds, should be added to the
respective fund balance unless legally available for unrestricted
purposes. If available for unrestricted purposes, these items should
be included in nonoperating revenue; if legal restrictions exist to
the contrary, investment losses in excess of gains of these other
restricted funds should be charged to restricted fund balance.
Gains or losses on investment trading between unrestricted
and restricted funds should be recognized and separately dis-
closed in the financial statements. Gains or losses resulting from
transactions between designated portions of the unrestricted fund
should not be recognized.

Pledges
All pledges, less a provision for amounts uncollectible, should
be accounted for in financial statements. Pledges should be appro-
priately classified in financial statements as unrestricted or re-
stricted. If unrestricted, revenue from pledges (net of provision
for uncollectibles) should be shown in financial statements of the
period in which the pledge is made as nonoperating revenue. If
part of the pledge is to be applied during some future period,
that part should be reported in financial statements of the period
in which it is received as deferred revenue or as additions to

10
restricted funds. If pledges are restricted in any other way they
should be reported as restricted funds.

Funds Held in Trust by Others

Some hospitals have endowment-type funds held in trust by
outside parties. The principal of the funds is usually not directly
or indirectly controlled by the hospital. These funds should not
be included in the balance sheet of the hospital but their exist-
ence should be disclosed.
In those instances where the trustee is to make distributions
to the hospital, the hospital should report these distributions on
an accrual basis as endowment income; also, disclosure of the
right to future income may be appropriate in footnote form,
depending upon the circumstances. If the distribution the trustee
makes to the hospital is discretionary, the hospital should report
these distributions as gifts or in any manner specified by the
terms of the trust or directions of the trustee.

Hospitals as a Part of Other Organizations

A hospital may be a part of a larger organization, such as a
medical school or a university, or one of a group of hospitals in
a corporation or a subsidiary corporation. A government hospital
may be a part of some larger governmental unit. Affiliated hos-
pitals may be operated under special management and affiliation
arrangements.
Accounting practices and reports of the hospital entity alone
should conform to those set forth in this guide.

Other Related Organizations

Auxiliaries, guilds, fund-raising groups, and other related or-
ganizations frequently assist hospitals. If such organizations are
not under the control of the hospital (usually these organiza-
tions are independent and are characterized by their own char-
ter, bylaws, tax-exempt status, and governing board), the finan-
cial reporting of these organizations should be separate from
reports of the hospital. If significant resources or operations of a

11
hospital are handled by such organizations, full disclosure should
be made of the related facts and circumstances. If such organi-
zations are under control of (or common control with) hospitals
and handle hospital resources, their financial statements should
be combined with those of the hospital.

Reporting an Accounting Change

Adjustments resulting from a change in accounting method to
comply with recommendations in this audit guide should be
treated as adjustments of prior periods, and financial statements
presented for the periods affected should be restated appro-
priately.
For guidelines in reporting upon the financial statements that
have been restated, the independent auditor should refer to State-
ment on Auditing Procedure No. 33, "Auditing Standards and
Procedures" (Chapter 8, paragraphs 23-27).
For any accounting changes subsequent to those required for
conforming with this audit guide, the Committee reaffirms the
applicability of APB Opinion No. 20 which defines various types
of accounting changes and establishes guides for determining
the manner of reporting each type.

12
 Chapter 3

Auditing Procedures-General
The primary purpose of this chapter and subsequent chapters
on auditing is to present auditing procedures specifically appli-
cable to hospitals. Although not contained in this guide, certain
procedures common to audits of other organizations may also
be pertinent.

Scope of Engagement
In each engagement, it should be understood in advance
whether the audit is intended to cover supplementary informa-
tion. In this regard, the independent auditor should consider
issuing or obtaining a letter setting forth the scope and terms of
his engagement.
Many third-party payors require hospitals to submit supple-
mentary cost reports to obtain reimbursement for services pro-
vided to patients covered under such payor's plans. Many such
supplementary reports require an independent auditor's opinion.
Other types of reports examined by independent auditors include
overhead cost reports for research contracts; reports to regional
or national health care organizations; reports for contributors;
and reports for local, state, or federal authorities in connection
with tax exemption matters. The independent auditor should
review all supplementary report requirements and plan his ex-
amination to comply with related filing deadlines.

Preparation for the Audit

As with any other examination, the independent auditor may
find it helpful to set up a permanent file, which may include
copies of the certificate of incorporation, bylaws, and organiza-

13
 tion charts. The following items are of particular significance in
hospital audits:

1. Documents relating to restrictions on gifts and bequests.

2. Contracts and agreements affecting finance and accounting,
such as agreements with doctors, technicians, third-party
payors, and so forth.
3. Tax-exemption letters.

Special emphasis should be placed on contractual arrange-

ments with third-party payors. In most hospitals, third-party reim-
bursement significantly affects financial position and results of
operations. Therefore, it is important for the independent auditor
to familiarize himself with third-party reimbursement arrange-
ments before undertaking his examination.4

Statistics
It is important for the independent auditor to familiarize him-
self with the method (or methods) by which the hospital seeks
reimbursement for services. Current practice emphasizes a reli-
ance on cost-finding as a means of calculating reimbursements
from third parties under various plans and arrangements (most
Blue Cross plans and Medicare use variations of cost-finding in
reimbursement formulas). It is therefore recommended that the
auditor know the details of the type or types of cost-finding re-
quired to be used by his hospital client.5
Hospitals usually compile statistical information on utilization
of services and facilities. Early in his engagement the independ-
ent auditor should ascertain the extent to which his examination
must be expanded to cover statistical data.

4 See section entitled "Cost Allocation and Apportionment" in Chapter 3

of Medicare Audit Guide (AICPA, 1969).
5 To provide a general background to cost-finding, the independent

auditor may find the following booklets helpful: Cost Finding for
Hospitals (American Hospital Association, 1957) and Cost Finding
and Rate Setting for Hospitals (American Hospital Association, 1968).

14
Other Considerations
To familiarize himself with an engagement and to pinpoint
trends in operations and financial position, the independent
auditor should usually review various data relating to the pre-
ceding period. Such review should ordinarily include documents
of the prior year such as financial statements previously reported
upon; interim financial statements, workpapers (particularly fol-
low-up notes and memoranda for future audits), audit programs,
internal control questionnaires, and management letters and cor-
respondence. In addition to the above review of prior year docu-
ments, the auditor should ordinarily:

1. Compare financial statements of the current period with

those of the prior period and obtain a satisfactory explanation
for unusual variances.
2. Review minutes of governing board meetings and those of
appropriate committees.
3. Ascertain, to the extent practicable and reasonable, compliance
with terms of financial agreements.
4. Be aware of the requirements in paragraph 6 of Chapter 2
of SAP No. 33 in regard to non-arm's-length transactions.
5. Review the status of unsettled cost reimbursement reports
for prior periods filed with third-party payors, and determine
the adjustments, if any, that may be required as a result of
this review.
6. Determine the propriety of the allocation of expenses between
the hospital and affiliated nursing homes, educational institu-
tions, and research programs.
7. Review relationship of affiliated organizations to the hospital
and determine the propriety of combining their financial state-
ments with those of the hospital (see Chapter 2, Other Re-
lated Organizations).
8. Review subsequent events and transactions and inquire of
appropriate officers as to changes in financial position.
9. Obtain a representation letter on financial information being
reported on, such as financial position, results of operations,
contingent liabilities, and so forth.

15
Management Letters
It is a common but not required practice for the independent
auditor to submit a letter to management commenting on his
findings and recommendations regarding internal control, ac-
counting procedures, and other matters. This letter should be
directed to appropriate officials, generally the chief administrative
officer, the governing board, or the audit committee.

16
 Chapter 4

Auditing Procedures —Assets

Cash
As in other organizations, a hospital may maintain one or
more bank accounts for operating purposes. Procedures for re-
cording receipts and disbursements will vary with the organiza-
tion. However, if the hospital receives donor-restricted funds, the
auditor should determine if it is required to maintain such funds
separately from the cash of unrestricted funds. The independent
auditor should also determine, by examining underlying docu-
mentation, other legal requirements relating to restricted cash.
In his evaluation of internal control, the auditor should deter-
mine the location of cash collection points in addition to the
cashier's office, such as emergency rooms, outpatient facilities,
and special service departments. He should also review arrange-
ments or agreements whereby the hospital collects cash for
others.

Investments
Some noteworthy features of accounting for hospital invest-
ments are: (1) accounting by specific fund, (2) differentiating
between principal and income transactions, and (3) pooling of
investments.
In order to obtain investment flexibility, hospitals frequently
pool resources of various funds for investment purposes. Because
net results of operating the pool do not usually show up as such
in financial statements, it is important that the net profit be allo-
cated equitably to, and reported in, statements of participating

17
funds. In order to accomplish an equitable allocation, investment
pools should be operated on the market-value method. Under the
market-value method, each participating fund is assigned a num-
ber of units based on the percentage it owns of the total pool.
Market value is used to determine the number of units to be
allocated to new funds entering the pool, or to calculate equity
of funds withdrawing from the pool. Net profit of pool operations
should be allocated to participating funds based on the funds'
equity or share of the pool.
Auditing procedures applicable to investments may include
reading custody agreements, reviewing control and safeguarding
procedures, confirming or examining securities, testing author-
ization and documentation supporting transactions, reviewing the
basis of valuation, and reporting income.
Specific inquiries in determining audit scope for investments
should ordinarily include:

1. Do provisions of deeds of gifts prohibit pooling investments?

2. Do provisions of deeds of gifts provide restrictions on the
nature or type of investments which may be acquired?
3. Does the accounting for pooled funds provide an equitable
distribution of income and gains (losses)?
4. Does accounting for investments provide for appropriate dis-
tinction between unrestricted and restricted resources?
5. Does the accounting for premiums, discounts, and stock divi-
dends provide for an appropriate distinction between prin-
cipal and income?
6. Are standard procedures in effect for recording investments
received as gifts; are they adequate? Do they include sending
acknowledgment letters to donors?
7. Does accounting for investments distinguish between market-
able and nonmarketable securities?
8. Has there been an impairment (other than a temporary one)
in the carrying value of investments?

Accounts Receivable
In hospitals, accounts receivable have one characteristic not
normally found in other organizations; full rate charges incurred

18
by patients are usually settled for amounts less than full rate. This
difference may be attributable to contractual arrangements with
third-party payors or to courtesy, charity, or other policy dis-
counts; these items are usually not recognized in the hospital rec-
ords until after the patient has been discharged.
Accounts-receivable controls may be maintained under the
following classifications:

Inpatients not discharged:

Blue Cross
Medicare
Medicaid
Compensation and liability cases
Other
Inpatients discharged:
Blue Cross
Medicare
Medicaid
Compensation and liability cases
Other
Outpatients:
Blue Cross
Medicare
Medicaid
Compensation and liability cases
Other
Other accounts receivable:
Government appropriations
Community Chest(s)/United Fund
Tuitions and fees
Pledges
Sundry

In practice, most hospitals set up accounts receivable from

inpatients and outpatients based on full-rate charges. Subse-
quently these hospitals reclassify such receivables to other payor
classifications without recognizing at that time deductions that
may be made at time of final settlement. For example, charges
originally set up in an inpatient account may be transferred to

19
 the Blue Cross account without recognizing the difference be-
tween that amount and the amount Blue Cross may pay in the
future to settle the account. In such a case, the difference will
be recognized in the hospital's records at the time payment is
received from Blue Cross. This situation requires that an allow-
ance be set up in financial statements being reported upon to
reflect amounts that are expected to be collected. Similarly, an
allowance should be set up to recognize other anticipated deduc-
tions such as charity, courtesy allowances, and policy discounts
which will be recognized in the hospital's records subsequent to
the balance sheet date.
Contractual arrangements between hospitals and third-party
payors often provide for tentative billing rates which are subject
to adjustment retroactively as a result of subsequent cost deter-
mination or negotiation. Although the rate finally agreed upon
may not be known by the auditor when he is ready to issue his
report, a reasonable estimate can usually be made of the adjust-
ment and should be reflected in the financial statements. When
settlement is finally made, any difference between the estimate
reported in the financial statements and the finally settled amount
recorded should be accounted for as indicated in Chapter 2
under the section on prior period adjustments.
In evaluating internal control and in determining the resultant
extent of auditing procedures to be applied, the auditor should
review the hospital's procedures for determining amounts that
are collectible for services. In this regard he should evaluate the
hospital's method of determining: (1) the indigency status of
patients on a timely basis, (2) the point at which accounts are
to be turned over to collection agencies or its in-house collection
department, and (3) the estimated provision of uncollectible
accounts.
Auditing procedures applicable to accounts receivable should
ordinarily include confirmation from discharged patients and
from third-party payors who have been billed by the hospital.
Attempting to obtain confirmation of receivables from patients
who are not discharged usually will be impracticable because
such patients usually do not know their indebtedness until they
are discharged. In such cases, alternative procedures as specified
in SAP No. 43, "Confirmation of Receivables and Observation of

20
Inventories," should be followed. The existence of third-party
payor contractual arrangements requires that appropriate audit
procedures be performed, including:

1. Confirmation with the third-party payor, if practicable.

2. Review to determine that adequate provision has been made
for differences between contractual interim billing rates and
full-rate charges.
3. Review of computations made to estimate the amount of
retroactive adjustments provided for in the accounts.
4. Review of related contracts to determine whether required
adjustments have been reflected in the accounts.
5. Review of cost reimbursement reports to determine that they
were prepared based on the principles of reimbursement of
the third-party payor.

From the viewpoint of disclosure in the balance sheet, it is

generally acceptable to combine all receivables in one amount.
Where third-party payor receivables are material, they may be
shown separately by payors (or debtors).
Interfund receivables and payables should be reviewed to evalu-
ate whether such items can be expected to be liquidated within
a reasonable period of time. The propriety of material advances
between restricted and unrestricted funds should also be deter-
mined.

Inventories
Hospital inventories usually are not material in relation to
financial position; inventory usage, however, may significantly
affect hospital operations. The inventory classifications most fre-
quently recorded in the accounts include: medical and surgical
supplies; drugs and medicines; linens, uniforms, and garments;
food; housekeeping supplies; office supplies; maintenance sup-
plies; and stationery and forms. Of these, medical and surgical
supplies and drugs and medicines are often the major items.
Internal control and auditing procedures with respect to hos-
pital inventories differ in some respects from those followed in

21
other organizations. Some differences are as follows:

1. Hospitals frequently employ independent organizations to

inventory and price drugs, medicines, and medical supplies.
This is done because the genuineness and quality of these
items can usually be determined more readily and accurately
by these organizations than by the hospital's staff. The auditor
should participate in the inventory program by reviewing the
independent organization's procedures, observing physical
counts, and testing pricing to the extent considered neces-
sary in the circumstances.
2. Hospitals sometimes receive free merchandise, drugs, food,
and other items. The auditor should ascertain that control
procedures for these items are in effect and that appropriate
recognition has been given in the accounts.

For financial statement presentation, inventories may be grouped

in one total or listed by major classification, e.g., medical and
surgical supplies, drugs and medicines, and so forth. The basis
of inventory valuation should be disclosed.

Property, Plant, and Equipment

A hospital may have access to the use of plant facilities under
a variety of arrangements: it may own the facilities outright; it
may rent the facilities from independent or related organizations;
it may partially rent (and partially own) them; it may have use of
facilities provided by a related institution, such as a religious or-
der, or by unrelated institutions under "affiliation" programs; or
the facilities may be provided by a governmental agency or unit
or a government-related hospital district. The auditor should in-
quire into, and the financial statements should disclose, the nature
of any relationship between the hospital entity and lessors, bail-
ors, or other owners of hospital property. Accounting Principles
Board Opinion No. 5, "Reporting of Leases in Financial State-
ments of Lessee," should be referred to in accounting for lease
arrangements.
In the absence of adequate property records, historical cost-
based appraisals are generally acceptable for financial presenta-

22
tion purposes. However, the independent auditor should satisfy
himself as to their propriety.
In evaluating depreciation policy, the auditor may refer to the
American Hospital Association's Chart of Accounts for Hospitals
which sets forth plant asset classifications and estimated useful
lives of depreciable assets. He should also be aware that the
accelerated pace of technological improvements in the medical
field makes obsolescence an important factor to be considered in
evaluating depreciation policy. APB Opinion No. 12, "Omnibus
Opinion—1967," should be referred to for information about de-
preciable assets that should be disclosed in the financial state-
ments.
Property, plant, and equipment not used for hospital operations
should be reported separately; examples are real estate received
as a gift and real estate investments of endowment funds.

23
 Chapter 5

Auditing Procedures-
Liabilities, Deferred Revenue, and
Fund Balances

Liabilities and Deferred Revenue

This group of accounts includes notes payable, accounts pay-
able, long-term and interfund debt, deferred revenue, and accru-
als for salaries, interest, vacations, and taxes. Included also are
liabilities to third-party payors for working capital advances and
for over-reimbursement.
Internal control should include separation of the approving and
paying functions, safeguards over purchasing and receiving (in-
cluding returned purchases and rebates), and a record of open
purchase orders and commitments.
In addition to auditing procedures usually performed in con-
nection with liability and deferred revenue accounts, the auditor,
depending on the facts in each case, should:

1. Determine that interfund accounts are in balance and that the

transactions recorded therein are authorized by the governing
board either by specific approval of each transaction or by
blanket approval of each type of transaction.
2. Review Medicare, Medicaid, or other third-party payor ad-
vance payment balances.
3. Review contract commitments with doctors, specialists, tech-
nicians, related parties, and others who perform services by
arrangement with the hospital.

24
4. Substantiate deferred fees for educational programs and re-
view existing subsidy or grant agreements for educational
purposes.
5. Consider claims against the hospital for negligence and mal-
practice for possible disclosure of contingent liabilities. Evi-
dence of claims may usually be obtained from claims agents,
insurance companies, and attorneys. Obtaining written repre-
sentation of claims information should be considered by the
auditor.
6. Consider the effect on financial statements caused by timing
differences between the period in which items enter into the
determination of reimbursement under third-party reimburse-
ment arrangements and the period in which such items enter
into the financial statements.
7. Review policies requiring deposits from certain classes of pa-
tients, such as maternity patients. From admitting and medi-
cal records, test application of these deposits; confirmation
on a test basis should be considered.
8. Ascertain that pension liabilities and income tax are ac-
counted for in accordance with APB Opinion No. 8, "Account-
ing for the Cost of Pension Plans," and APB Opinion No. 11,
"Accounting for Income Taxes," respectively.

Fund Balances
Fund balances represent the net equity of funds. Unrestricted
fund balance includes working capital, net resources invested in
plant assets, board-designated funds, and other unrestricted re-
sources. Restricted funds consist of:

1. Specific purpose resources placed with the hospital in a trus-

tee-like arrangement.
2. Plant replacement and expansion resources contributed for
additions to property, plant, and equipment. These balances
include amounts that are required to be used for property
additions, as specified in agreements with third-party payors,

25
 and must be distinguished from board-designated unrestricted
funds.
3. Endowment fund resources held for the production of income.
Endowment funds terminating after a period of time or upon
the happening of a certain event should ordinarily be disclosed
separately from other permanent endowment funds.

Individual funds comprising a particular total should be of the

same general type. Specific purpose funds, for example, may
include donor-restricted gifts, endowment income, and research
grants—all of which are designated for a specific purpose or
project. Competent evidential matter should be examined to
support the purported nature of the fund and its purpose.
When examining such evidence (that is, minutes, agreements,
contracts, and other documents) together with any related re-
strictions, the independent auditor should determine whether:

1. The description of the fund balance indicates the nature of

the resources accounted for in the fund.
2. All subsidiary funds in a particular control fund balance have
the same general characteristics.
3. Restricted and unrestricted fund balances are adequately de-
scribed and differentiated in the financial statements.

In instances where the description of the fund balances is not

adequate or where the general characteristics of subsidiary funds
in a particular control fund balance are dissimilar, the description
or characteristics of a fund balance should be further described
and clarified in the footnotes to the financial statements.

Changes In Fund Balances

A statement of changes in fund balances should include all
changes in funds. In auditing this statement, the independent
auditor should test to satisfy himself that:

1. Transfers from endowment or other restricted funds are in

accordance with donors' instructions.

26
2. Transfers have been made from restricted to unrestricted
funds for additions to property, plant, and equipment financed
by restricted resources.
3. Receipt and acknowledgment procedures for all gifts exist
and that restrictive covenants are being complied with. (In-
come and expenditures included in restricted funds should be
reviewed to determine that such items are accounted for in
accordance with the governing instrument.)
4. Earnings (losses) on investments of each restricted fund are
properly accounted for. (If investments are pooled, the auditor
should test to satisfy himself that earnings (losses) are ac-
counted for in appropriate funds.)
5. Changes in restricted fund balance involving research grants
are in accordance with grant agreements. (The auditor should
review the budget, expenditures, term, billing procedures, al-
lowable cost provisions, and any renegotiation requirements.
He should also review the adequacy of reserves for disallow-
ances of cost items and other adjustments.)

Additions to restricted fund balances may result from fund-

raising campaigns. When a separate campaign office is established
to oversee the campaign, and it functions as a physically separate
operation from the hospital with its own plan of internal control,
the independent auditor should review control features, such as
the following, to determine the basis and the extent of the testing
required:

1. Control over the issuance of solicitation material, particularly

pledge cards.
2. Separation of duties between individuals handling pledge
cards and those handling cash.
3. Control over official records of gifts. (This type of control
should be established initially and maintained throughout
the campaign.)
4. Separation of duties involving receiving, depositing, and
checking of official records against bank deposits.
5. Establishment of control over mail receipts.

27
6. The use of an independent party for some of the critical
functions such as:
a. A bank or other fiscal agent as receiving agent for the
campaign.
b. An independent organization for circularizations with
pledgors.

28
 Chapter 6

Auditing Procedures-
Revenues and Expenses

Patient Service Revenue

The patient service revenue account should show a complete
summary of gross revenues earned at established rates on an
accrual basis.
Patient service revenue is comprised of three major classifica-
tions:

1. Revenue from daily patient services (routine services). This

includes revenue from room, board, and general nursing
services. Daily patient services may be classified by sources
as follows:
Medical
Surgical
Pediatrics
Intensive care
Psychiatric
Obstetric
Newborn nurseries
Premature nurseries
Other
2. Revenue from other nursing services. This includes revenue
from services of other units organized under the nursing divi-
sion and may be classified as follows:
Operating room
Recovery room

29
 Delivery and labor room
Central services and supply
Intravenous therapy
Emergency service
Other
3. Revenue from other professional services (ancillary services).
These may be classified as follows:
Laboratories
Blood bank
Electrocardiology
Radiology
Pharmacy
Anesthesiology
Physical therapy
Other

Patient service revenue accounts are often subclassified by

type of patient:
Inpatients
Acute
Long-term
Outpatients
Emergency (referred or clinical)
Day care
Home care
Financial status
Self-pay
Blue Cross
Insurance
Government (Medicare, Medicaid, etc.)
Charity
Accommodation
Private
Semi-private
Ward

While many systems of internal control applicable to revenue

of other organizations are also applicable to hospitals, the fol-

30
lowing deserve special note: internal control over routine charges
should be maintained through the daily census while internal
control over other charges may be effected by use of prenum-
bered departmental tickets for each revenue source or a log
numbering system (initiated at the time of the request for service
or the time service is provided) or such other system which
assures that services provided are charged to the patient. Regard-
less of whether the service will be paid for, control over charges
for the service provided should be exercised.
The independent auditor should make sufficient tests of both
gross revenue and deductions therefrom to satisfy himself that
the hospital's system of internal control and accounting proce-
dures are comprehensive enough to cover any unusual circum-
stances with patients' accounts. To provide this assurance, the
auditor ordinarily should:

1. Ascertain that revenue is accrued as service is performed and

that related contractual and free-care allowances are ac-
counted for in accordance with hospital policy.
2. Test propriety of charges to patients' accounts with patients'
medical records; also compare medical records to the patients'
accounts.
3. On a test basis compare patient charges and the hospital's
standard billing rates.
4. Compare revenues of the current period with those of the
prior period and obtain an explanation for unusual variances.
5. Review statistical reports (of patient days and lab tests, for
example) to determine reliability of statistics presented.
6. Perform overall tests of revenue based upon patient days and
other statistics of service for each classification. (In some
situations, statistical records of specific types of service can
be reconciled with recorded revenue.)

Deductions From Revenue

Deductions from revenue include (1) allowances which repre-
sent differences between gross revenue charges and amounts
received (or to be received) from patients or third-party payors

31
for services performed and ( 2 ) a provision for uncollectible ac-
counts. Types of allowances are:

1. Charity allowances—the difference between gross revenue

charges at established rates and amounts received (or to be
received) from indigent patients, voluntary agencies, or gov-
ernmental units on behalf of specific indigent patients.
2. Courtesy allowance or policy discounts—the difference be-
tween established rates and amounts recovered or to be
recovered for services provided for doctors, clergymen, em-
ployees, and employees' dependents.
3. Contractual adjustments—the difference between billings at
established rates and amounts received or to be received from
third-party payors under contractual agreements.

Allowances should be recorded on an accrual basis in accord-

ance with generally accepted accounting principles.
For financial statement purposes, allowances and uncollectible
accounts should be reported net of related revenue; such revenue
includes gifts, grants, or endowment income restricted for assist-
ance to charity patients or charity operations—for example, a free
clinic. If material, such revenue should be disclosed in the finan-
cial statements.
Auditing procedures for revenue deductions, including an eval-
uation of internal control, should closely parallel those applicable
to revenue and should ordinarily be performed in conjunction
with the examination of accounts receivable and revenues. With
regard to internal control, the auditor should ascertain that author-
ity to approve deductions is separate from the cash and billing
functions. The auditor should review the hospital's procedures
for determining retroactive revenue adjustments as a result of
cost determination or negotiations.
Contracts with third-party payors should be reviewed by the
auditor to determine bases of reimbursement. This review should
include computation of estimated adjustments to revenue re-
quired under such contracts. Frequently these adjustments will
have to be estimated since required cost reports may not be avail-
able until after the auditor completes his examination. In evaluat-
ing such adjustments, the auditor may either (1) prepare the

32
reimbursement computation on an estimated basis; ( 2 ) com-
pare per diem interim rates established by third-party payors with
estimated average allowable per diem cost experienced, and
multiply the difference by the patient days served under the
contract; or (3) use other techniques which may be appropriate
in the circumstances.

Other Operating Revenue

Other operating revenue includes revenue from nonpatient
care services to patients, and sales and activities to persons other
than patients. Such revenue is normal to the day-to-day operation
of a hospital but should be accounted for separately from patient
revenue.
Other operating revenue normally includes:

1. Revenue from educational programs. Includes tuition for

schools, such as schools for nursing, laboratory technology,
and X-ray technology.
2. Research and other specific purpose grants. Revenue from
grants, gifts, or subsidies specified by donor for research,
educational or other programs.
3. Miscellaneous. Other items includable in the classification
of "other operating revenue" are:
a. Revenue from rental of space in hospitals, clinics, and
schools of nursing, and also from employees and others.
b. Accommodation sales of medical and pharmacy supplies
to employees, doctors, and others.
c. Revenue from fees charged for transcripts or reproduction
of medical or billing records for attorneys, insurance com-
panies, and others.
d. Proceeds from sale of cafeteria meals and guest trays to
employees, medical staff, and visitors.
e. Recovery of charges for personal telephone calls.
f. Proceeds from sale of metal scrap, dietary waste, used
X-ray film, placentas, and so forth.
g. Revenue from gift shops, snack bars, newsstands, parking
lots, coin-vending machines, and other service facilities
operated by the hospital.

33
Nonoperating Revenue
Nonoperating revenue includes revenue not directly related to
patient care, related patient services, or the sales of related goods.
It usually includes the following:

1. Unrestricted gifts. This includes all gifts, grants, and legacies

upon which there are no donor-imposed restrictions. Grants
for general operating purposes from foundations and similar
groups are includable in this classification. For financial state-
ment purposes, all unrestricted gifts, grants, and legacies
should be reported initially in this classification regardless of
the ultimate purpose to which they may be designated by the
governing board (see Unrestricted Gifts in Chapter 2 ) .
2. Unrestricted income from endowment funds. This includes
income earned on investments of those endowment funds that
have no restrictions on income.
3. Miscellaneous. If an item of a type normally included in mis-
cellaneous revenue is material, it should be separately dis-
closed. Items frequently grouped under this caption are:
a. Income and gains from investments of unrestricted funds-
includes interest, dividends, rents, or other income on
investments as well as net gains or losses resulting from
investment transactions.
b. Donated services—the value of services contributed to
the hospital by volunteers (see Donated Services, Supplies,
Property, and Equipment in Chapter 2 ) .
c. Gain on sale of hospital properties.
d. Net rentals of facilities not used in the operation of the
hospital.
e. Term endowment funds upon termination of restrictions.

The following internal control suggestions relate to nonpatient

revenue (classified as other operating revenue or nonoperating
revenue):

1. Revenue from educational programs can generally be con-

trolled internally through enrollment statistics, registration rec-
ords, or class admission reports. These records should be
reconciled with revenues periodically.

34
2. Specific research projects should be properly authorized and
a determination made as to the specific purpose funds avail-
able to cover related costs. Amounts of specific purpose funds
transferred to cover authorized research expenditures are in-
cludable under nonpatient revenue. Research expenditures
should be properly controlled and related to budgets and
authorizations.
3. Internal control over unrestricted gifts may be exercised
through written gift receipt and acknowledgment procedures.

Among audit tests to be considered in connection with the

review of nonpatient revenue are the following:

1. Review of data and documents underlying gifts, grants, and

bequests, including correspondence, acknowledgment receipts
and notifications, and minutes of governing board and com-
mittee meetings.
2. Tests of grants for research and receipts for other restricted
purposes by reference to appropriate contracts and documents,
including budgets of related projects, cost reports, and other
supporting documentation. Audit procedures should include
reviewing field audit reports prepared by representatives of
grantors. When the hospital is administering large grants in-
volving research centers or similar operations, separation of
functions and methods of apportionment of applicable ex-
penses should be reviewed.
3. Comparison of recorded revenue from educational activities
with estimated revenue determined by independent computa-
tion; this computation can usually be made using fee sched-
ules and statistical enrollment reports.

Expenses
The American Hospital Association's Chart of Accounts for
Hospitals may be used as a guide for establishing expense classi-
fications in hospitals. Suggested major classifications of expenses
are:
Nursing services
Other professional services

35
 General services
Fiscal services
Administrative services
These classifications are subdivided by organizational unit
(responsibility center).
An object or natural classification is also provided indicating
the nature of the expense, such as:
Salaries and wages
Employee benefits
Fees to individuals and organizations
Supplies
Purchased services
Other expense
The extent of classifications and subclassifications depends
upon many factors such as size of the hospital, degree of manage-
ment and accounting sophistication, and external requirements
for cost reports or comparability with other hospitals.
Expenses incurred in soliciting funds for a fund-raising cam-
paign should be disclosed separately in the financial statements.
Showing these expenses as a deduction from related revenue is
usually an acceptable manner of reporting.
Internal control over hospital expenses requires the same gen-
eral procedures as are required in any other organization: separa-
tion of duties, competent personnel, adequate payroll procedures,
control over procurement and stores, and so forth.
Payrolls generally represent a major portion of a hospital's
operating costs; therefore, tests of payrolls would represent an
important procedure in the audit.
In addition to performing the regular tests of transactions, the
auditor should:

1. Review comparative operational statistics and the relationship

of such statistics to changes in expenses.
2. Examine agreements between the hospital and hospital-based
physicians and:
a. Test calculations based on agreements.
b. Obtain written representation from the administrator out-
lining terms of any verbal agreement and, where appro-
priate, confirm the details of agreements with physicians.

36
 c. Review the basis upon which the hospital has segregated
charges if it bills for hospital-based physicians.
3. Test the hospital's method of recording services (and sup-
plies ) furnished to employees, such as value of meals, housing,
and laundry; test distribution of these items to various depart-
ments and the treatment thereof for Social Security, with-
holding tax, and insurance purposes.
4. Test procedures for recording charges for special nurses and
the rebilling of such charges to hospital patients.
5. For hospitals which record values for contributed services,
the following should ordinarily be considered:
a. Test the compensation value assigned to services contrib-
uted by non-paid individuals based on time spent and job
description by comparison with compensation paid to
workers in similar positions.
b. Determine that maintenance costs incurred on behalf of
contributing personnel have been considered in arriving
at salary equivalents.
c. Examine time records supporting the salary-equivalents for
voluntary services and test computations.
6. Review fund-raising costs of endowment or building fund
campaigns to determine whether such expenses are properly
chargeable thereto.
7. Review and analyze, where necessary, the following:
Maintenance and repairs
Operations of plant
Professional fees (other than medical)
Administration and general expense
Laboratory supplies and expense
X-ray supplies and expense
Pharmacy supplies and expense
Dietary supplies and expense
Operating room supplies and expense
Medical and surgical expense
New or unusual expense accounts
Miscellaneous expense

37
 Chapter 7

Financial Statements
Basic financial statements of a voluntary hospital consist of
the following:
Balance sheet
Statement of revenues and expenses
Statement of changes in fund balances
Statement of changes in financial position
Notes to financial statements
Statements of revenues and expenses and of changes in fund
balances may be set forth separately as shown in the accompany-
ing Exhibits B and C, pages 42 and 43. Alternatively, a combined
statement of revenues and expenses and changes in unrestricted
fund balance—which also should reflect the details of changes in
the composition of unrestricted funds—may be presented as shown
in the accompanying Exhibit D, pages 44 and 45. If the alter-
native combined statement is provided, a separate statement of
changes in the restricted fund balances should also be included.
Basic statements may be accompanied by schedules which set
forth supplementary information such as the following:
Patient service revenue
Operating expenses

38
Illustrations of these statements and schedules follow. Illustrative
statements for investor-owned (proprietary) hospitals are not in-
cluded since they should follow reporting requirements of other
investor-owned businesses.
It should be noted that information about the accounting
policies adopted and followed by the hospital should be disclosed
in the financial statements. This disclosure is recommended by
APB Opinion No. 22, "Disclosure of Accounting Policies." The
text of the Opinion should be referred to for the content and
format of disclosure.

39
 Sample Hospital EXHIBIT A

40
Balance Sheet
December 31, 19
With Comparative Figures for 19—
Current Trior Liabilities and Fund Current Prior
Assets Year Year Balances Year Year

Unrestricted Funds
Current: Current:
Cash $ 133,000 $ 33,000 Notes payable to banks $ 227,000 $ 300,000
Receivables (Note 3) 1,382,000 1,269,000 Current installments of long-
term debt (Note 5) 90,000 90,000
Less estimated uncollec- Accounts payable 450,000 463,000
tibles and allowances (160,000) (105,000) Accrued expenses 150,000 147,000
1,222,000 1,164,000 Advances from third-party
Due from restricted funds 215,000 payors 300,000 200,000
Inventories (if material, state Deferred revenue 10,000 10,000
basis) 176,000 183,000 Total current liabilities 1,227,000 1,210,000
Prepaid expenses 68,000 73,000
Deferred revenue—third-party
Total current assets 1,814,000 1,453,000 90,000
reimbursement (Note 4) 200,000
Other: Long-term debt (Note 5):
Cash (Note 2) 143,000 40,000 Housing bonds 500,000 520,000
Investments (Notes 1 and 2) 1,427,000 1,740,000 Mortgage note 1,200,000 1,270,000
Property, plant, and equip- Total long-term debt 1,700,000 1,790,000
ment (Notes 4 and 5) 11,028,000 10,375,000 6,918,000
Fund balance* 7,400,000
Less accumulated deprecia-
tion (3,885,000) (3,600,000)
Net property, plant, and
equipment 7,143,000 6,775,000
Total (Note 2) $10,527,000 $10,008,000 Total $10,527,000 $10,008,000
 Restricted Funds

Specific purpose funds: Specific purpose funds:

Cash $ 1,260 $ 1,000 Due to unrestricted funds $ 215,000 $
Investments (Note 1) 200,000 70,000 Fund balances:
Grants receivable 90,000 Research grants 15,000 30,000
Other 61,260 41,000
76,260 71,000
Total specific purpose Total specific purpose
funds $ 291,260 $ 71,000 funds $ 291,230 $ 71,000

Plant replacement and expan- Plant replacement and expan-

sion funds: sion funds:
Cash $ 10,000 $ 450,000 Fund balances:
Investments (Note 1) 800,000 290,000 Restricted by third-party
Pledges receivable, net of esti- payors $ 380,000 $ 150,000
mated uncollectible 20,000 360,000 Other 450,000 950,000
Total plant replacement Total plant replacement
and expansion funds $ 830,000 $ 1,100,000 and expansion funds $ 830,000 $ 1,100,000
Endowment funds:
Endowment funds:
$ 50,000 $ 33,000 Fund balances:
Cash
Permanent endowment $ 4,850,000 $ 2,675,000
Investments (Note 1) 6,100,000 3,942,000
Term endowment 1,300,000 1,300,000
Total endowment funds $ 6,150,000 $ 3,975,000 Total endowment funds $ 6,150,000 $ 3,975,000

See accompanying Notes to Financial Statements.

• Composition of the fund balance may be shown here, on the Statement of Changes in Fund Balance (such as illustrated in Ex-
hibit D), or in a footnote.

41
 EXHIBIT B
Sample Hospital
Statement of Revenues and Expenses
Year Ended December 31, 19
With Comparative Figures for 19

Current Prior
Year Year
Patient service revenue $8,500,000 $8,000,000
Allowances and uncollectible accounts (after
deduction of related gifts, grants, subsidies,
and other income-$55,000 and $40,000)
(Notes 3 and 4) (1,777,000) (1,700,000)
Net patient service revenue 6,723,000 6,300,000

Other operating revenue (including $100,000

and $80,000 from specific purpose funds) 184,000 173,000
Total operating revenue 6,907,000 6,473,000

Operating expenses:
Nursing services 2,200,000 2,000,000
Other professional services 1,900,000 1,700,000
General services 2,100,000 2,000,000
Fiscal services 375,000 360,000
Administrative services (including interest
expense of $50,000 and $40,000) 400,000 375,000
Provision for depreciation 300,000 250,000
Total operating expenses 7,275,000 6,685,000
Loss from operations (368,000) (212,000)

Nonoperating revenue:
Unrestricted gifts and bequests 228,000 205,000
Unrestricted income from endowment
funds 170,000 80,000
Income and gains from board-designated
funds 54,000 41,000
Total nonoperating revenue 452,000 326,000
Excess of revenues over expenses $ 84,000 $ 114,000

See accompanying Notes to Financial Statements.

42
 Sample Hospital EXHIBIT C
Statement of Changes in Fund Balances
Year Ended December 31, 19
With Comparative Figures for 19
Current Prior
Year Year
Unrestricted Funds
Balance at beginning of year $6,918,000 $6,242,000
Excess of revenues over expenses 84,000 114,000
Transferred from plant replacement and ex-
pansion funds to finance property, plant,
and equipment expenditures 628,000 762,000
Transferred to plant replacement and expan-
sion funds to reflect third-party payor rev-
enue restricted to property, plant, and
equipment replacement (230,000) (200,000)
Balance at end of year $7,400,000* $6,918,000

Restricted Funds
Specific purpose funds:
Balance at beginning of year $ 71,000 $ 50,000
Restricted gifts and bequests 35,000 20,000
Research grants 35,000 45,000
Income from investments 35,260 39,000
Gain on sale of investments 8,000 —

Transferred to:
Other operating revenue (100,000) (80,000)
Allowances and uncollectible accounts (8,000) (3,000)
Balance at end of year $ 76,260 $ 71,000
Plant replacement and expansion funds:
Balance at beginning of year $1,100,000 $1,494,000
Restricted gifts and bequests 113,000 150,000
Income from investments 15,000 18,000
Transferred to unrestricted funds (de-
scribed above) (628,000) (762,000)
Transferred from unrestricted funds (de-
scribed above) 230,000 200,000
Balance at end of year $ 830,000 $1,100,000
Endowment funds:
Balance at beginning of year $3,975,000 $2,875,000
Restricted gifts and bequests 2,000,000 1,000,000
Net gain on sale of investments 175,000 100,000
Balance at end of year $6,150,000 $3,975,000

See accompanying Notes to Financial Statements.

Composition of the balance may be shown here, on the balance sheet, or
in a footnote.

43
 Sample Hospital EXHIBIT D

44
Statement of Revenues and Expenses and
Changes in Unrestricted Fund Balance
(Alternative Presentation)
Year Ended December 31, 19
With Comparative Figures for 19

Current Year Prior Year

Operations Other Plant Total Total

Patient service revenue $8,500,000 - - $8,500,000 $8,000,000

Allowances and uncollectible accounts

(after deduction of related gifts,
grants, subsidies, and other income—
$55,000 and $40,000) (Notes 3 and 4) (1,777,000) - - (1,777,000) (1,700,000)
Net patient service revenue 6,723,000 - - 6,723,000 6,300,000

Other operating revenue (including

$100,000 and $80,000 from specific pur-
pose funds) 184,000 - - 184,000 173,000
Total operating revenue 6,907,000 - - 6,907,000 6,473,000

Operating expenses:
Nursing services 2,200,000 2,200,000
Other professional services 1,900,000 1,900,000
General services 2,100,000 2,100,000
Fiscal services 375,000 375,000
 Administrative services (including in-
terest expense of $50,000 and $40,-
000) 400,000 400,000
Provision for depreciation 300,000 300,000
Total operating expenses 7,275,000 7,275,000
Loss from operations (368,000) - - (368,000) (212,000)

Nonoperating revenue:
Unrestricted gifts and bequests $ 228,000 - 228,000 205,000
Unrestricted income from endowment
funds 170,000 - 170,000 80,000
Income and gains from board-desig-
nated funds 24,000 $ 30,000 54,000 41,000

Excess of revenues over expenses (368,000) 422,000 30,000 84,000 114,000

Fund balance at beginning of year 153,000 1,780,000 4,985,000 6,918,000 6,242,000

Transferred from restricted funds 628,000 628,000 762,000
Transferred to restricted funds (230,000) - - (230,000) (200,000)
Intra-fund transfers 832,000 ( 632,000) (200,000) -0- -0-

Fund balance at end of year $ 387,000 $1,570,000 $5,443,000 $7,400,000 $6,918,000

See accompanying Notes to Financial Statements.

NOTE: If the alternative format above is presented, the total column must be included to present fairly the information contained
therein.

45
 Sample Hospital EXHIBIT E

46
Statement of Changes in Financial Position of
Unrestricted Fund

With Comparative Figures for 19

Year Ended December 31, 19

Current Prior
Year Year
Funds provided:

Loss from operations $ (368,000) $ (212,000)

Deduct (add) items included in operations not requiring (providing) funds:
Provision for depreciation 300,000 250,000
Increase in deferred third-party reimbursement 110,000 90,000
Revenue restricted to property, plant, and equipment replacement transferred
to plant replacement and expansion fund (230,000) (200,000)
Funds required for operations (188,000) (72,000)
Nonoperating revenue 452,000 326,000
Funds derived from operations and nonoperating revenues 264,000 254,000
Decrease in board-designated funds 210,000
Property, plant, and equipment expendituresfinancedby plant replacement
and expansion funds 628,000 762,000
Decrease in working capital 46,000
$1,102,000 $1,062,000
 Current Prior
Year Year
Funds applied:
Additions to property, plant, and equipment $ 668,000 $ 762,000
Reduction of long-term debt 90,000 90,000
Increase in board-designated funds 210,000
Increase in working capital 344,000 -
$1,102,000 $1,062,000
Changes in working capital:
Increase (decrease) in current assets:
Cash $ 100,000 $ (50,000)
Receivables 58,000 75,000
Due from restricted funds 215,000 (100,000)
Inventories (7,000) 16,000
Prepaid expenses (5,000) 1,000
361,000 (58,000)
Increase (decrease) in current liabilities :
Note payable to banks (73,000) 50,000
Accounts payable (13,000) 10,000
Accrued expenses 3,000 2,000
Advances from third-party payors 100,000 40,000
Deferred revenue 2,000
17,000 104,000
Increase (decrease) in working capital $ 344,000 $ (46,000)

See accompanying Notes to Financial Statements.

47
 Sample Hospital
Notes to Financial Statements
December 31, 19

NOTE 1: Investments are stated in the financial statements at cost.

Cost and quoted market values at December 31, are summa-
rized as follows:

Quoted
Cost Market
Board-designated funds $1,427,000 $1,430,000
Specific-purpose funds 200,000 210,000
Plant replacement and expansion
funds 800,000 838,000
Endowment funds 6,100,000 8,200,000

NOTE 2 : O f t o t a l u n r e s t r i c t e d assets of $ 1 0 , 5 2 7 , 0 0 0 , $ 1 , 5 7 0 , 0 0 0 has

been designated for expansion of outpatient facilities; these assets are
shown as other assets because they are not expected to be expended
during 19

NOTE 3: Revenues received under cost reimbursement agreements

totaling $4,000,000 for the current year and $3,000,000 for the prior
year are subject to audit and retroactive adjustment by third-party
payors. Provisions for estimated retroactive adjustments under these
agreements have been provided.

NOTE 4: Property, plant, and equipment is stated at cost. A sum-

mary of the accounts and the related accumulated depreciation
follows:

Accumulated
Cost Depreciation
Land 300,000 $ - 0 -
Land improvements 140,000 100,000
Buildings 7,088,000 2,885,000
Fixed equipment 2,000,000 800,000
Movable equipment 1,500,000 100,000
$11,028,000 $3,885,000

Depreciation is determined on a straight-line basis for financial state-

ment purposes. The hospital uses accelerated depreciation to determine
reimbursable costs under certain third-party reimbursement agreements.

48
Cost reimbursement revenue in the amount of $110,000 resulting
from the difference in depreciation methods is deferred in the current
year and will be taken into income in future years.

N O T E 5: The 3 percent housing bonds are payable in varying annual

amounts to 19 and are collateralized by a mortgage on a nurses'
residence carried at $800,000.
The mortgage note is payable in quarterly installments of $17,500
with interest at 4 percent through 19 , and is collateralized by land
and buildings carried at $2,800,000.

N O T E 6: The hospital has a noncontributory pension plan covering

substantially all employees. Total pension expense for the year was
$48,000, which includes amortization of prior service cost over a
period of 20 years. The hospital's policy is to fund pension costs ac-
crued. The actuarially computed value of vested benefits as of Decem-
ber 31, 19 exceeds net assets of the pension fund and balance sheet
accruals by approximately $156,000.

49
 Schedule I
Sample Hospital
Patient Service Revenues
Year Ended December 31, 1 9 —
With Comparative Figures for 19

Current Year Prior Year

Daily patient services: $

Medical and surgical
Pediatrics
Intensive care
Psychiatric
Obstetric
Newborn nurseries
Premature nurseries
Other

Other nursing services:

Operating rooms
Recovery rooms
Delivery and labor rooms
Central services and supply
Intravenous therapy
Emergency units
Other

Other professional services:

Laboratories
Blood bank
Electrocardiology
Electroencephalography
Radiology
Pharmacy
Anesthesiology
Physical therapy
Social service
Other

Total patient service revenue $

50
 Sample Hospital Schedule 2

Operating Expenses
Year Ended December 31, 19—
With Comparative Figures for 19
Current Year Prior Year
Supplies Supplies
Personal and Other Personal and Other
Services Expense Services Expense
Nursing services: $
Administrative office
Medical and surgical
Pediatrics
Intensive care
Psychiatric
Obstetric
Newborn nurseries
Premature nurseries
Other units
Operating rooms
Recovery rooms
Delivery and labor rooms
Central services and supply
Intravenous therapy
Emergency service
Education
Other _
i
Other professional services: $
Administrative office
Laboratories
Blood bank
Electrocardiology
Electroencephalography
Radiology
Clinics
Inhalation therapy
Medical records
Pharmacy
Anesthesiology
Physical therapy
Social service
Education
Research
Other _
$

51
 Sample Hospital Schedule 2
Operating Expenses (cont'd) (cont'd)
Current Year Prior Year
Supplies Supplies
Personal and Other Personal and Other
Services Expense Services Expense
General services: $
Administrative office
Dietary
Plant engineering
Power plant
Electricity and refrigeration
Maintenance shops
Automotive service
Elevator operators
Security
Housekeeping
Laundry and linen
Personnel quarters
Printing and duplicating
Physicians' offices
Auxiliary units

Fiscal services: $
Administrative office
Accounting
Admitting
Credits and collections
Data processing
Receiving
Cashier
Communications
Storerooms
Other
$
Administrative services: $
Executive office
Personnel
Purchasing
Public relations
Governing board
Medical staff
Employee benefits
Insurance
Auxiliaries
Interest
Other
$
52
 Chapter 8

Independent Auditors' Reports

Statement on Auditing Procedure No. 33, which prescribes the

recommended form of auditor's report, should be referred to in
reporting on hospital financial statements. As provided in Chap-
ter 10 of this Statement, such a report may contain an unqualified
opinion, a qualified opinion, a disclaimer of opinion, or an ad-
verse opinion. The facts and circumstances in each examination
will govern the appropriate opinion. Reports appearing in this
chapter are presented to illustrate the application of the form of
auditors' reports prescribed in Chapter 10 of SAP No. 33 in some
situations commonly faced by the independent auditor in exam-
ining financial statements of hospitals.
When supplemental schedules accompany the basic exhibits,
the auditor should either indicate in the opinion paragraph the
responsibility he is taking for the schedules, or include a separate
opinion on the schedules. (See Chapter 12 of SAP No. 33.)

Departures From Standard Short-Form Report

If the valuation of investments is not in accordance with gen-
erally accepted accounting principles, a qualification of the report
might be stated as follows:

It is the practice of the hospital to reflect investments of endow-

ment funds at quoted market value at the balance sheet date
whereas under generally accepted accounting principles, such
assets should be reported at cost. Such valuations at December
31, 19 and December 31, 19 were $ X X and $XX, respec-
tively, in excess of cost.

53
 In our opinion, except for the effect of reflecting investments
of endowment funds at market value as stated in the preceding
paragraph . . . .

Under Medicare and other third-party payor programs, the

hospital and the third party may agree to a rate schedule for
interim charges with the understanding that a retroactive adjust-
ment may be made based upon allowable costs as contractually
defined. Such adjustments are usually based on periodic cost
reports prepared by the hospital subject to audit by third parties.
The independent auditor may be able to satisfy himself as to
the amounts due to or from payors for the current as well as
prior years. In other cases, cost reports may not have been filed;
cost reports that were filed may be insufficient for the independent
auditor's purposes because of the absence of adequate supporting
data; or the review of cost reports may indicate that the amount
of final settlement is significantly uncertain because of the pos-
sible effect of a matter(s) not reasonably determinable at the
time of his report, as in the case of disputes over the interpreta-
tion of Medicare regulations.
If, as a result of his review of underlying data, the independent
auditor believes that amounts shown as due from (or due to)
the third party have not been properly determined; or if there
has been a "scope limitation" on his examination, he should
issue an "except for" opinion, an adverse opinion, or a disclaimer
of opinion as appropriate in the circumstances. However, if he
believes that the amount has been fairly determined based on
the best information available at the time of his examination but
the amount of final settlement is uncertain because of the pos-
sible effect of a matter(s) not reasonably determinable at that
time, a "subject to" opinion or a disclaimer of opinion may be
appropriate. Examples of forms of such opinions are:

Absence of Data Supporting Settlement

Medicare accounts receivable at June 30, 19 and the related
revenues included in the accompanying financial statements are
based upon billings at provisional rates. Final reimbursement
under the Medicare program is based on allowable costs which
must be reported to and reviewed by the Medicare fiscal inter-
mediary. Sufficient data was not available to evaluate the effect,
if any, which the final determination of reimbursable costs may

54
have upon accounts receivable, patient revenue, loss for the year,
and unrestricted fund balance.
In our opinion, except for the effect, if any, of the final deter-
mination of the Medicare reimbursement referred to in the pre-
ceding paragraph . . . .

Uncertainty of Amount of Settlement

During 19 , the fiscal intermediary questioned the hospital's
entitlement to reimbursement of services rendered to Medicare
patients on the basis that such services may have been custodial
in nature and not medically necessary. Since resolution of this
question cannot be ascertained until final audit and negotiation
between the hospital and the Medicare intermediary and is
based on medical matters beyond substantiation by auditing
procedures, it is uncertain whether the amounts reported as rev-
enue and receivables arising from services rendered under the
Medicare program will be reimbursed.
In our opinion, subject to the effect, if any, of the final deter-
mination of Medicare reimbursement as described in the preceding
paragraph . . . .

55
APPENDIX

Glossary
Knowledge of special terminology used in hospital accounting
is necessary for an understanding of a hospital's financial state-
ments. Terms most frequently used are defined in this section.
No attempt has been made to define all accounting, technical,
medical, and semi-medical terms used.
Definitions used in this section have been adapted from a vari-
ety of sources, including:
Terminology bulletins of the AICPA
Kohler's A Dictionary for Accountants (Prentice-Hall, Inc.,
1970)
Chart of Accounts for Hospitals (American Hospital Asso-
ciation, 1966)
Uniform Hospital Definitions (American Hospital Associa-
tion, 1960)
College and University Business Administration (American
Council on Education, 1968)

Allowance. The difference between gross revenue from services ren-

dered and amounts received (or to be received) from patients or
third-party payors. Allowances are to be distinguished from uncol-
lectible accounts resulting from credit losses.
Annuity funds. Funds given to an institution as consideration for an
agreement to pay periodically to the donor (or specified designated
individuals) stipulated amounts, for the period set forth in the
agreement.
Board-designated funds. Unrestricted funds set aside by the govern-
ing board for specific purposes or projects.
Board-designated investment funds. Unrestricted funds which, at the
discretion of the governing board, have been designated for invest-
ment to produce income as if they were endowment funds.
Construction and equipment funds. See Plant replacement and ex-
pansion funds.

56
Contractual replacement funds. Funds set aside by agreement with
third-party payors for renewal and replacement of property, plant,
and equipment.
Contributed services. See Donated services.
Cost finding. The segregation of direct costs by cost centers, the
allocation of overhead costs to revenue-producing and other centers
between inpatients, outpatients, and other classifications.
Donated services. The estimated monetary value of service of per-
sonnel who receive no monetary compensation or partial compen-
sation for their services. The term is usually applied to services
rendered by members of religious orders, societies, or similar groups
to institutions operated by or affiliated with such institutions.
Endowment funds. Funds in which a donor has stipulated, as a con-
dition of his gift, that the principal of the fund is to be maintained
inviolate and in perpetuity and that only income from investments of
the fund may be expended. (See also Term-endowment funds.)
Functional classification. The grouping of expenses according to the
operating purposes (e.g., patient care, education, research) for
which costs are incurred.
Fund. A self-contained accounting entity set up to account for spe-
cific activity or project.
Fund balance. The excess of assets over liabilities (net equity). An
excess of liabilities over assets is known as a deficit in fund balance.
Funds functioning as endowment. See Board-designated investment
fund, which is the preferred term.
Funds held in trust by others. Funds held and administered, at the
direction of the donor, by an outside trustee for the benefit of an
institution or institutions.
Governing board. The policy-making body of the institution. Some
of the responsibilities usually attributed to the governing board may
be assumed by appropriate committees.
Living trust funds. Funds acquired by an institution subject to agree-
ment whereby resources are made available to the institution on
condition that the institution pay periodically to a designated person,
or persons, the income earned on the resources acquired for the
lifetime of the designated person, or persons, or for a specified
period.
Non-expendable funds. See Endowment funds, which is the preferred
term.
Object classification. A method of classifying expenditures according
to their natural classification such as salaries and wages, employee
benefits, supplies, purchased services, etc.
57
Permanent funds. See Endowment funds, which is the preferred
term.
Plant. Physical properties used for institutional purposes; i.e., land,
building, improvements, equipment, and so forth. The term does not
include real estate or properties of restricted or unrestricted funds
not used for hospital operations.
Plant replacement and expansion funds. Funds donated for renewal
or replacement of plant.
Pooled investments. Assets of two or more funds consolidated for
investment purposes.
Restricted funds. Funds restricted by donors for specific purposes.
The term refers to specific purpose and endowment funds.
Retirement of indebtedness funds. Funds required by external
sources to be used to meet debt service charges and the retirement
of indebtedness on plant assets. The term "sinking funds" is some-
times used to describe these funds.
Share of pooled investments. The proportion of pooled investments,
including accumulated gains or losses, owned by a particular fund,
usually expressed by a number (units) indicating the fractional
ownership of total shares in the pool or by a percentage expressing
the portion of the total pool owned by the particular fund.
Sinking fund. See Retirement of indebtedness funds.
Special purpose fund. See Specific purpose funds.
Specific purpose funds. Funds restricted for a specific purpose or
project. Board-designated funds do not constitute specific purpose
funds.
Temporary funds. See Specific purpose funds.
Term endowment funds. Donated funds which by the terms of the
agreement become available either for any legitimate purpose desig-
nated by the board or for a specific purpose designated by the donor
upon the happening of an event or upon the passage of a stated
period of time.
Unexpended plant funds. See Plant replacement and expansion funds.
Unrestricted funds. Funds which bear no external restrictions as to
use or purpose; i.e., funds which can be used for any legitimate
purpose designated by the governing board as distinguished from
funds restricted externally for specific operating purposes, for plant
replacement and expansion, and for endowment.

58