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Historical or Aquisition cost is a way to valuate an asset based on objective value. The strength in using this principle is that there is no "question as to the objectivity of the valuation" (Finkler et al., 2024). The textbook uses the example of valuating the land that a hospital acquired, at which they initially paid $10 per acre on a 1000 acre property. The historical valuation would mean that the land is worth $10,000 which signifies a fair picture of the cost. The problem with this amount is that it doesn't account for inflation or that the land is in a sought-after area of the city, which could make it more valuable to prospective buyers. (Finkler et al., 2024)

Taking into account how much inflation has played a part in the valuation of an asset, a proposal is to use the method referred to as price-level adjusted historical cost This method accounts for the weakness of using the historical cost by using the consumer price index to "adjust the value of all assets based on a general rate of inflation" (Finkler et al., 2024). Although this methos helps with inflation it can't accurately account for the fact that not everything rises at the same rate. For example, the land a hospital was built on may have a higher rate of inflation than the sterile gloves used for procedures. This can be problematic when as asset worth a high amount can be valuated on a balance sheet as being worth less. (Finkler et al., 2024)

The method of Net realizable cost is the valuation of assets measured at "what you could get if you were to sell them". This method is valuable when a potential creditor wants to assess if the company could pay off its creditors if it sold all its assets. The weakness with this method is that value is based on a "subjective estimate of what the asset could be sold for" (Finkler et al., 2024).

A fourth way to valuate assets is the future profits method in which the assets are valued by the "profits they contribute to the organization in the future" (Finkler et al., 2024). This method is useful when it's an organization specializing in a product that may not have a ready buyer, for example, a patent or specialized machinery. Subjectivity also becomes an issue with this method because the estimates are again dependent on the honesty of management seeing as these assets can be so specialized. Dishonesty can lead to an inaccurate valuation. (Finkler et al., 2024)

2. Adjusting for the difference in historical cost and current cost can be done by following the Generally Accepted Accounting Principles for different assets. One way is to use the constant dollar valuation which bases the change in the value of assets over timeto be induced by price level inflation" (Finkler et al., 2024). By using the consumer price index, the assets can be adjusted at a general inflation rate. Since the GAAP acknowledges that not all assets have the same rate of inflation it, it requires that stocks and bonds be valued based on their fair value. This means the organization must record the current price the stock was last traded for on the balance sheet. (Finkler et al., 2024)

3. Under a managed car contract a healthcare organization must record insurance money as a liability not a revenue. (Finkler et al., 2024) This means that the healthcare organization is obligated toprovide care or risk breaking the contract, committing fraud, orgetting its privileges revoked with said private or public insurance. From my experience this is a big issue, we must get yearly training on this because if the hospital or medical office is found liable for not providing care or caught doing fraudulent claims there will be legal action taken and we can lose our medicare/medicaid contract. This would elimiate a whole population of revenue that uses medicare/medicaid and be financially disastrous. This is significant for our area, in the Rio Grande Valley, where a big population of our residents rely on this public insurance.

Reference:

Finkler, S. A., Calabrese, T. D., & Ward, D. M. (2024). Accounting fundamentals for health care management. Jones & Bartlett Learning.