Federal Nursing Home Administrator Practice Exam

What does capital signify in terms of financial statements?

1. Cost of services

2. Net worth or fund balance

3. Summary of asset ownership

4. Total liabilities

The correct answer is: Net worth or fund balance

Capital in financial statements refers to the net worth or fund balance of an organization. This is a critical measure of financial health, representing the difference between total assets and total liabilities. It reflects the amount that is owned by the organization after all debts have been settled, which is crucial for stakeholders, including investors and creditors, to assess the financial stability of the entity. Net worth is an important indicator as it shows the residual claims on assets after all liabilities have been accounted for. A positive net worth means that the organization has more assets than liabilities, which is a sign of good financial health. Conversely, a negative net worth indicates that the organization may be in financial distress. While costs of services, asset ownership, and total liabilities are related financial concepts, they do not encapsulate the notion of capital in the same way. Cost of services refers specifically to the expenses incurred in providing services; a summary of asset ownership details what the organization owns rather than its overall financial position; and total liabilities represent the debts of the organization rather than the equity or net worth that capital signifies. Thus, the correct understanding of capital as net worth or fund balance is essential for a comprehensive assessment of any financial statement.