Healthcare Finance Test 3

A fire has destroyed a large percentage of the financial records of the Carter Health System. You have the task of piecing together information to prepare a financial report. You have found the profit margin to be 5.4 percent. If sales were $4 million on total assets of $2 million, and the amount of debt financing was $800,000, what was Carter's return on equity (ROE)? (Hint: Use the Du Pont equation to answer this question.)

18.0%

Which of the following statements about the organization of the balance sheet is correct?

Both a and b above are correct

Fund accounting is used by investor-owned (for-profit) businesses to differentiate between operating funds and retirement funds.

False

Which of the following statements about cash versus accrual accounting is correct?

In cash accounting, an event is recognized when a cash transaction occurs.

Which of the following statements about the income statement is correct?

It reports the economic profitability of an organization

Your hospital has decided to purchase a new piece of laboratory equipment for $300,000. The equipment has a 5-year useful life and a salvage value of 5% purchase price. Compute the straight-line depreciation. Show all work.

Straight-line depreciation = (new price-depreciation prices)/useful life ($300,000 - ($300,000x.05))/5 years = ($300,000-$15,000)/5 = $285,000/5 = $57,000 This means the this piece of laboratory equipment will depreciate by $57,000 each year for the next 5 years.

In ratio analysis, a single value has little meaning. Therefore analysts use trend and comparative analyses to help "interpret the numbers"

True

Assume that the value of diagnostic equipment suddenly falls because of technological obsolesce. How is the balance sheet adjusted to preserve the accounting identity?

equity is reduced

KPI stands for

key performance indicator

which of the following statements concerning net income versus cash flow is correct?

net income can be converted into a rough measure of cash flow by adding noncash expenses, typically depreciation

Which of the following statements concerning net income is correct?

a, b, and c are correct

Which of the following items are part of a business's set of financial statements?

a, b, and c, above

Describe the major difference between cash and accrual accounting. Examples may be used.

While cash and accrual accounting are both helpful when it comes to finance, there is a major difference between them. With cash accounting, a company does not add the encounter to their statement until the cash is actually received for the service. For example, say a healthcare organization bills out a $700 statement to a third-party payer in December of 2004. However, this payer does not end up reimbursing the healthcare entity until February of 2005. Using cash accounting, this would go on the 2005 statement rather than the 2004 statement as this was when they actually received the cash for the service. This is the most common in healthcare, used by about 80% of organizations. The benefit is that it aligns best when it comes to taxation. Accrual accounting is just the opposite of cash accounting. Taking the same example as above, if the third-party payer was billed at the end of '04 and they didn't pay on it until '05, this would still go on the 2004 statement as that is when the charge was incurred, So cash accounting charts on the statement when the cash is received while accrual accounting charts on the statement at the point in time when the service is initially billed out.

Which of the following statements about the limitations of financial condition analysis is correct?

a, b, and c, above

Which of the following statements about financial condition analysis is correct?

all of the above statements are correct

Assume that a business's balance sheet reports total assets of $500,000 and total liabilities of $300,000. Now assume that $20,000 of net fixed assets (net plant and equipment) are written off due to technological obsolescence. All else the same, what is the total equity of the business after the write-off?

$180,000

Grady Home Health has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000 and total assets of $22,500,000, what is Grady's return on assets (ROA)?

13.3%

Like the income statement, the balance sheet reports the assets and liabilities of an organization over some period of time.

False

The primary difference between financial statement analysis and operating analysis is that operating analysis does not use benchmarking while financial statement analysis does.

False

The set of rules and regulations that govern the content and format of financial statements is called Government Acceptable Procedures (GAP)

False

To create common size financial statements, all income statement items and balance sheet accounts are divide by total assets.

False

Under accrual accounting, all revenues reported on the income statement represent cash collections.

False

List the types of revenue that can be found on the income statement.

Some of the different types of revenues that can be found on an income statement include operating and non-operating revenue. Operating revenue is anything that the company gains through it's day to day business operations. For example, in healthcare this may be reimbursement from third-party payers on patient accounts. Non-operating expenses are those which are not a normal/regular part of business and therefore should be counted separately from the operating expenses. These are incomes that are not consistent and cannot be relied on. An example of this may be a donation to a hospital's Foundation. While this is still a revenue, it is going to happen infrequently and the organization can't rely on this Hail Mary one to keep itself afloat.

Which of the following statements about income statement expenses is correct?

Supplies are expensed (shown) on the income statement when consumed (used to provide patient services)

Which of the following statements about the balance sheet is correct?

The asset side of the balance sheet is listed in increasing order of liquidity (i.e. the more illiquid assets are listed first)

Which of the following statements is correct?

The business, in the aggregate over time, has been profitable.

Assume that the business uses $10,000 of its cash t pay for supplies that were ordered on credit terms and have already been received and booked (recorded on the balance sheet). Which of the below statements reflects the resulting balance sheet change?

The cash account decreases by $10,000 and the accounts payable account decreases by $10,000

Assume that the business uses $30,000 of its cash to pay salaries. Which of the below statements reflects the resulting balance sheet change?

The cash account decreases by $30,000 and the retained earnings account is reduced by $30,000

Discuss the primary purpose of the income statement and list the major components.

The primary purpose of the income statement is to show the profitability of an organization. it lists out what an organization has coming in, going out, and overall what they are profiting from this. Therefore, the three major components of an income statement include revenue, expenses, and profits. An example of a revenue may be reimbursement gained from a third-party payer. An example of an expense may be paying out salaries or payments on equipment. The profit would be determined by subtracting the expenses from the revenues and this is the extra money the organization has after paying out all of their expenses.

The requirement to provide financial accounting information is driven by the need for outside stakeholders (primarily investors) to have reliable information about the financial status of an organization.

True

Which of the following equations best describes the accounting identity?

assets = liabilities + equity

Which of the following statements about gross and net patient service revenue is correct?

both a and b above are correct

Which of the following statements concerning depreciation expense is correct?

depreciation expense accounts for the loss of value of fixed assets (plant and equipment)

Under accrual accounting, all expenses reported on the income statement represent cash costs.

false