Finance I (1 of 2)

Why is occupancy rate important?

Overhead costs are the same no matter how many patients, so increasing occupancy rate will spread this cost out amongst more patients. Expressed as a %; higher is better. Occupancy rate = Inpatient days / (Number of licensed beds x 365)

What does an income statement report?

An organization's operations over a period of time. Consists of revenues, expenses, and one or more profit measures.

Define going concern.

Assume the business will continue indefinitely. Assets should be valued on the basis of their contribution to an ongoing business as opposed to their current fair market value.

What line items belong under LIABILITIES AND EQUITY in a balance sheet?

+ Current liabilities (Accounts payable, Notes payable, Accrued expenses, Salaries payable = Total current liabilities) + Equity = Total liabilities and equity

What line items belong under OPERATING REVENUE in an income statement?

+ Patient service revenue - Less: provision for bad debts = Net operating revenue

What line items belong under EXPENSES in an income statement?

+ Salaries and benefits + Medical supplies + Depreciation (Total expenses) =Net Income (Net operating revenue - Total expenses)

What line items fall under current liabilities on the balance sheet?

- Notes payable (loans) - Accounts payable (vendors) - Accrued expenses (wages and taxes)

What are the 4 most important financial statements?

1. Balance sheet 2. Income statement / Statement of operations 3. Statement of cash flows 4. Statement of changes in equity

Describe the methods of reimbursement.

1. Capitation - per member, per month 2. Fee-for-service - includes: - Charge base - Cost base - Prospective - per diagnosis (DRG), per diem, bundled, prospective

What assets belong in the current assets section of the balance sheet?

1. Cash and cash equivalents 2. Short term investments 3. Net patient accounts receivable 4. Inventories 5. Other current assets

What are the assumptions, principles, and constraints of GAAP?

Assumptions 1. Going concern 2. Accounting entity 3. Monetary unit 4. Periodicity Principles 5. Historical cost 6. Expense matching 7. Revenue recognition principle 8. Full disclosure Constraints 9. Materiality 10. Cost-benefit

The statement of financial position is most commonly called the ______________.

Balance sheet

What are 3 types of insurance reimbursement?

1. Cost-based - based on costs incurred in providing services 2. Charge-based - based on charges from chargemaster/list prices, rate schedule is previously established for profit & negotiations usually bring down the chargemaster rate 3. Prospective payment - established by the third-party payer in advance (not related to chargemaster rates or costs)

________________ is another term for comparative analysis.

Benchmarking

What are the 4 primary financial statements?

1. Income statement 2. Balance sheet 3. Statement of cash flows 4. Statement of changes in equity

What are the 4 basic characteristics of insurance?

1. Pooling of losses 2. Payment only for random loss 3. Risk transfer from insured to insurer 4. Indemnification - reimbursement to the insured if a loss occurs

What are the 4 characteristics of insurance?

1. Pooling of losses 2. Payment only for random losses 3. Risk transfer 4. Indemnification (reimbursement if a loss occurs)

What are the 2 types of third party payers?

1. Public - Medicare, Medicaid, VA, CHIP, Tricare 2. Private - Blue Cross/Blue Shield, commercial insurance, self insurance

_________________ is the value of an organization's assets, liabilities, and equity as reported on the balance sheet.

Book value

What are the some alternative legal forms of business?

1. Sole proprietorship 2. Partnership 3. Corporation 4. Limited liability partnership (LLP) 5. Limited liability corporation (LLC) 6. Professional corporations (PC) / Professional associations (PA)

What are the 3 components of an RVU?

1. Work Expense 2. Practice Expense 3. Malpractice Expense

What are the 3 parts of RVUs?

1. Work Expense - Determines skill level/training with intensity required for service 2. Practice Expense - Accounts for equipment and supplies 3. Malpractice Expense - Accounts for relative risk and cost of potential malpractice claims

What is net property and equipment (fixed assets)?

A business's long term assets, such as land, buildings, and equipment. Listed on balance sheet at historical cost.

Define debt ratio.

A debt utilization ratio that measures the proportion of debt (versus equity) financing. Typically defined as total debt (liabilities) divided by total assets.

What is a Du Pont analysis and what does it tell you?

A financial statement analysis tool that decomposes return on equity into 3 components. Expressed as a %; importance is in the components, not the total number. Can compare the 3 against other years and competition. ROE = Total margin x Total asset turnover x Equity multiplier

What is the statement of cash flows?

A financial statement that focuses on the cash flows that come into and go out of a business.

What is a balance sheet?

A financial statement that lists a business's assets, liabilities, and equity (fund capital).

________________ refers to the structure of an organizations financing mix as shown on the balance sheet.

Capital structure

Define liability.

A fixed financial obligation of the business. Largest liability claims are by creditors (lenders) who have made loans (supplied debt capital) to the business.

What is a dashboard?

A format for presenting a business's key performance indicators.

Define operating margin.

Operating income divided by net operating revenues. Operating margin = Operating income / Net operating revenues

What does days in patient accounts receivable measure?

(Asset mgmt ratio) Measures effectiveness in managing receivables - how long it takes a company to collect. Expressed as a number; lower is better. Days in patient accounts receivable = Net patient accounts receivable/(Net patient service revenue⁄365)

What does total asset turnover measure?

(Asset mgmt ratio) Measures the turnover or utilization of ALL assets. Expressed as a number; higher is better. Total asset turnover = Total revenues / Total assets

What does fixed asset turnover measure?

(Asset mgmt ratio) Measures the turnover or utilization of fixed assets. Expressed as a number; higher is better. Fixed asset turnover = Total revenues / Net fixed assets

What does average age of a plant measure?

(Asset mgmt. ratio) Measures the avg age in years of a business's fixed assets. Average age of a plant = Accumulated depreciation / Depreciation expense

What does debt-to-capitalization ratio measure?

(Debt mgmt. / Capitalization ratio) Reflects the organization's proportion of debt used in a business's permanent capital structure. Expressed as a %; higher means more use of debt capital. Debt-to-capitalization ratio = Long-term debt/(Long-term debt+Equity)

What does debt ratio measure?

(Debt mgmt. / Capitalization) The percentage of total capital provided by creditors. Expressed as %; the higher the ratio, the riskier a creditor's position. Debt ratio = Total debt / Total assets

What does times interest earned (TIE) ratio measure?

(Debt mgmt. / Coverage ratio) Measures how much money of accounting income is available to pay each dollar of interest expense. Could a company easily expand their use of debt financing. Expressed as a number; minimum 1.5, higher means they could afford to use more debt financing. TIE = EBIT/Interest expense

What does cash flow coverage (CFC) ratio measure?

(Debt mgmt/ Coverage ratio) Shows the amount by which cash flow covers fixed financial requirements. Expressed as a number; higher is better. CFC = (EBIT+Lease payments+Depreciation expense)/((Interest expense+Lease payments+Debt principal)⁄((1-T)))

What does days cash on hand measure?

(Liquidity ratio) How able an organization is to meet its payments as they come due. Expressed as a number of days; higher is better. Days cash on hand = (Cash and equivalents+Short-term investments)/(((Expenses-Depreciation))⁄365)

What does current ratio measure?

(Liquidity ratio) Shows what the immediate liquidation of current assets at book value would be. Expressed as a number; higher is better. Current ratio = Current assets / Current liabilities

What does profit per discharge measure?

(Profit indicator) Measures the amount of profit on inpatient services earned per discharge. Expressed as a $ amount; higher is better. Profit per discharge = Inpatient profit / Total discharges

What line items belong under ASSETS in a balance sheet?

+ Current Assets (Cash, Accounts receivable, supplies = Total current assets) + Long-term investments + Property and equipment (less accumulated depreciation = Net property and equipment) = Total Assets

What are profitability ratios?

A group of ratios that measure different dimensions of a business's profitability. Ex: Total margin, Operating margin, Return on assets, Return on equity

What are debt management (capital structure) ratios?

A group of ratios that measure the extent of a business's financial leverage (Capital Structure). Two different categories: capitalization ratios and coverage ratios.

What is net working capital?

A liquidity measure equal to current assets minus current liabilities.

Define depreciation.

A non-cash charge against earnings on the income statement that reflects the "wear and tear" on a business's fixed assets (property and equipment). Depreciation = (Initial cost - salvage value at end of useful life) / useful life

What is a real asset?

A physical asset, such as a medical practice or a piece of diagnostic equipment, that has the potential to generate future cash inflows.

What is trade analysis?

A ratio analysis technique that examines the value of a ratio over time to see if it is improving or deteriorating.

What is a financial asset?

A security, such as a stock or bond, that represents a claim on a business's cash flows. Purchased with the expectation of receiving future payments.

What are unrestricted funds?

A self-contained pool set up to account for a specific activity or project.

What is fund accounting?

A system for recording financial statement data that categorizes accounts as restricted or unrestricted. Only applicable to not-for-profits.

What are Relative Value Units (RVUs)?

A value placed on the care provided based on time spent, skill required, and intensity required to provide a service.

What is a contra-account?

An account that reduces the value of it's "parent" account. Ex: accumulated depreciation.

Define current asset.

An asset that is expected to be converted into cash within one accounting period (usually 1 yr). Purpose is to support current ops and provide liquidity, but must be balanced due to low or zero return on current assets.

What's the difference between a balance sheet and income statement?

An income statement shows the financial status of an organization over time (usually 1 year), whereas a balance sheet shows the financial status at a given point in time.

Define asset.

An item that either possesses or creates economic benefit for the organization.

The recording of economic events when a cash exchange takes place is called _________________.

Cash accounting

What is the cash flow equation?

Cash flow = Net income + depreciation

When utilizing _____________, all income statement items are divided by total revenues, and all balance sheet items are divided by total assets.

Common size analysis

What are permanently restricted funds?

Contributions that must be maintained permanently by the organization.

What are the 4 Cs that summarize specific finance activities?

Cost Cash Capital (funds used to acquire fixed assets) Control

___________ is a group of ratios that measure the extent of an organizations financial leverage.

Debt management ratios

Define depreciation shield.

Depreciation expenses reduce a business's taxable income, thereby creating tax protection.

What is amortization?

Depreciation of non-tangible assets. Ex. patent, copyright, trademark

Define non-operating income.

Earnings unrelated to core business activities, like contributions and investment income.

What's the difference between equity and net assets?

Equity is the value of an investor-owned company, net assets is the value of a not-for-profit.

Why is operating margin important?

Evaluates the organization's profitability based on the core operating activities alone.

What is the difference between operating income and net income?

Operating income focuses on the profitability of a provider's core operations, while net income represents the total economic profitability of a business.

___________ is the financial ratio that measures the amount of operating profit per dollar of operating revenue.

Operating margin

Managers of health services organizations must understand the basics of __________ because ___________ are the best way to summarize a business's financial status and performance

Financial accounting Financial statements

What is the full disclosure principle?

Financial statements must contain a complete picture of the economic events of the business.

What are cash flows from investing activities?

Focus on both property and equipment (fixed assets) investments.

What are cash flows from operating activities?

Focus on the sources and uses of cash tied directly to operations. Operating cash flow = operating income + depreciation

What are cash flows from financing activities?

Focus on use of securities to finance operations and other business activities.

What does operating margin measure?

Focuses on core business activities, answers: are core operations more profitable than the industry average. Expressed as %; higher is better. Operating margin = Operating income / Net operating revenues

A system for recording financial statement data that categorizes accounts as restricted or unrestricted is called ________________.

Fund accounting

What are temporarily restricted funds?

Funds provided by donors that have stipulated either time or predetermined goal restrictions.

What is GAAP?

Generally accepted accounting principles. Establish the standards for financial accounting measurement and reporting. Sanctioned by the SEC (Securities and Exchange Commission) and FASB (Financial Accounting Standards Board).

Define liquidity.

How able a business is to convert assets to cash and pay bills as they become due.

What does return on equity measure?

How much income was generated of each dollar of equity investment. Shows how well investor owned businesses are using owner supplied capital. Expressed as a %; higher is better. Return on equity = Net income / Total equity

What is the purpose of a statement of changes in equity?

Indicates how much of the total profitability (net income) is retained for use by the reporting organization.

Financial condition analysis can be limited by _____________.

Inflation effects Development of comparative data Interpretation of results

___________ is the largest resource item used in the hospital industry.

Labor

What are current liabilities?

Liabilities that must be paid within one accounting period.

__________ ratios measure the ability of an organization to meet its cash obligations as they come due.

Liquidity

The section of the balance sheet that represents debt financing to the organization with maturities of more than one accounting period is called ________________.

Long-term debt

What is the Sarbanes-Oxley Act (SOX)?

Measure to improve transparency in financial accounting and to prevent fraud following ENRON.

What are MS-DRGs?

Medicare Severity diagnosis-related groups - 751 groups. Predict costs of a patient based on historical similar patient consumption of hospital resources.

Define operating revenue.

Monies collected or expected to be collected that are related to the core business (namely, patient services).

Two measures of profitability found on the income statement are _________ & ___________.

Net income Operating income

What is the relation between the income statement and balance sheet?

Net income (the bottom line) on the income statement is equal to the change in equity from one year to the next on the balance sheet.

What is the bottom line of the income statement?

Net income - the total earnings of a business, including both operating and non-operating income.

Define total profit margin.

Net income divided by total revenues. Total margin = Net income / Total revenues

Current assets minus current liabilities is referred to as ____________________.

Net working capital

What type of organization uses fund accounting?

Not-for-profits

What is the difference between notes payable and long term debt?

Notes payable are current liabilities (due within 1 accounting period) and long term debt has a maturity of greater than 1 year.

What is default?

Occurs when a borrower fails to make a promised debt payment. Technical default can occur when the borrower fails to meet a restriction in the loan agreement, even if the borrower is making the required payments.

What is the materiality principle?

Only entries that are important to the operational and financial status of the organization need to be separately identified on the income statement.

Net operating revenues minus total expenses is ______________.

Operating income

What is the role of finance in healthcare?

Plan, acquire, and utilize resources to maximize efficiency (value) of the enterprise. - Planning & budgeting - Financial reporting - Capital investments - Financing decisions - Revenue cycle and current accounts management - Contract management - Financial risk management

The income statement summarizes an organization's expenses, revenues, and ___________________.

Profitability

The Du Point equation is expressed as:

ROE = Total margin x Total asset turnover x Equity multiplier ROE = ROA x Equity multiplier

What are liquidity ratios?

Ratios that measure the ability of a business to meet its cash obligations as they come due. Ex. Current ratio, Days cash on hand

What are capitalization ratios?

Ratios that use balance sheet data to determine the extent to which borrowed funds have been used to finance assets.

What are coverage ratios?

Ratios that use income statement data to determine the extent to which fixed financial charges are covered by reported profits.

Define retained earnings.

Represents the accumulation of earnings over time that are reinvested in the business. Only the portion of retained earnings that is sitting in the cash account is immediately available to the business for use. Common stock + retained earnings = total equity

What is accumulated depreciation?

Represents the total dollars of depreciation that have been expensed on the income statement against the historical cost of the organization's fixed assets.

What is the expense matching principle?

Requires that an organization's expenses be matched, to the extent possible, with the revenues to which they are related.

What does return on assets measure?

Shows how productively a business is using its assets. Answers: Of each dollar of assets generated how much is profit. Expressed as a %; higher is better. Return on assets = Net income / Total assets

What are some other names for the income statement?

Statement of operations Statement of activities Statement of revenues and expenses

What does total margin measure?

The ability of the organization to generate revenues from all sources and control expenses- the higher the better. Expressed as %; higher is better. Total margin = Net income / Total revenues

What is comparative analysis?

The comparison of key financial and operational measures of one business with those of comparable businesses or industry averages, also called benchmarking.

What is the revenue recognition principle?

The concept that revenues must be recognized in the accounting period in which they are realizable and earned.

Define expense.

The cost of doing business.

What is financial accounting?

The field of accounting that focuses on the measurement and communication of the economic events and status of an entire organization.

What is accounting identity / the basic accounting equation?

The left side of balance sheet must equal right side. A = L + E

What is ratio analysis?

The process of creating and analyzing ratios from financial statement and other data to help assess a business's financial condition.

What is financial statement analysis?

The process of using data contained in financial statements to make judgments about a business's financial condition. Answers: Does the business have the financial capacity to perform it's mission.

What is operating indicator analysis?

The process of using operating indicators to help explain a business's financial condition. Includes: occupancy, patient mix, length of stay, productivity measures.

Define historical cost.

The purchase price of an asset.

What is accrual accounting?

The recording of economic events on an income statement in the periods in which the events occur, even if the associated cash receipts or payments happen in a different period.

What is cash accounting?

The recording of economic events when a cash exchange takes place.

Describe the third-party payer system.

Third-party payer is a generic term for any outside party, typically an insurance company or government program, that pays for part or all of a patient's health care services.

What does coding achieve?

Translates medical services into reimbursable codes.

What is equity?

VALUE. The book value of the ownership position in a business, where book value is the value that appears on a business's financial statements. Called net assets in a not-for-profit business.