Healthcare Finance Exam 1

The goal (purpose) of cost allocation is to assign all overhead costs to the activities (departments) that cause the costs to be incurred. True False

True

Two years ago, you invested $1,000 in a healthcare stock. Your return during the first year was -50 percent, while your return in the second year was +50 percent. Your investment is now worth $1,000. True False

False

The time value of money principle is based on the fact that money expected to be received in the future is worth more than cash in-hand. True False

Flase

A medical home (patient-centered medical home) is a team-based model of care led by a personal physician who works collaboratively with the team's other healthcare professionals to provide continuous, coordinated, and integrated care throughout a patient's lifetime. True False

True

A net present value of zero ($0) signfies that the project's cash inflows will: (1) be sufficient to recover the project's costs, and; (2) earn a return equal to the project's opportunity cost of capital. True False

True

Above-average -risk projects are assigned a cost of capital that is higher than the corporate cost of capital. True False

True

Although many factors influence the interest rate set on a loan, the two most important are risk and inflation. True False

True

Float is the difference between the balance shown on the bank's books and the balance on the business's own checkbook. True False

True

For investor-owned businesses, a capital investment financial analysis identifies projects expected to contribute to owner (shareholder) wealth. True False

True

In general, short-term securities are chosen on the basis of safety. That is, protection of principal takes precedence over amount of return. True False

True

Scenario analysis examines the impact of several potential economic outcomes on the profitability of project. True False

True

Pay-for-performance plans typically: a. Reward providers for meeting specified quality (and sometimes cost) standards b. Reward providers for increasing hospital referrals c. Reward insurers for lowering premiums d. Reward insured individuals for using fewer healthcare services e. Reward insured individuals for not engaging in risky behaviors, such as smoking

a. Reward providers for meeting specified quality (and sometimes cost) standards

Which of the following statements about capital rationing is correct? a. Capital rationing occurs when a business does not have the capital necessary to fund all acceptable projects. b. Capital rationing occurs when a business has more capital available than needed to fund all acceptable projects. c. Under capital rationing, the typical approach is to accept all projects with negative net present values. d. Answers (a) and (b) are correct.

a. Capital rationing occurs when a business does not have the capital necessary to fund all acceptable projects.

Which of the following statements about cash versus accrual accounting is correct? a. In cash accounting, an event is recognized when a cash transaction occurs. b. In accrual accounting, an event is recognized when a cash transaction occurs. c. Most large healthcare organizations use cash accounting. d. Most small healthcare organizations use accrual accounting because it closely matches statements required for income tax purposes. e. In cash accounting, an event is recognized when the obligation for a cash transaction is created.

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

Which of the following statements about not-for-profit corporations is correct? a. They can issue tax-exempt (municipal) debt. b. They typically pay federal income taxes. c. They typically pay local and state taxes. d. Community residents exercise control of such corporations by voting for the board of directors (trustees). e. They pay dividends to owners.

a. They can issue tax-exempt (municipal) debt.

Which of the following statements concerning net income versus cash flow is correct? a. Net income is a rough measure of a business's cash flow. b. Net income can be converted into a rough measure of cash flow by adding noncash expenses, typically depreciation. c. Net income can be converted into a rough measure of cash flow by adding nonoperating income. d. Net income can be converted into a rough measure of cash flow by adding the provision for bad debts. e. None of the above statements is correct.

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

The cost of debt capital to a business is measured by: a. The maturity date b. The interest rate c. The amount borrowed d. The cost of equity e. None of the above

b. The interest rate

Which of the following statements about accountable care organizations (ACOs) is correct? a. ACOs must include the following set of providers: hospital, physician group, urgent care center, and home health agency. b. ACOs need only a minimum of managerial systems in place because the payer (primarily Medicare) assumes most of the managerial functions. c. ACOs can distribute bonuses when targets are met and impose penalties when targets are missed. d. ACOs are radically different from other attempts to improve the delivery of health services. e. ACOs are established and owned by insurance companies.

c. ACOs can distribute bonuses when targets are met and impose penalties when targets are missed.

In the United States, the highest proportion of healthcare expenditures is for: a. prescription drugs b. nursing home care c. hospital care d. dental care e. home health care

c. hospital care

Businesses hold short-term securities for which of the following reasons? a. As a substitute for cash b. As a temporary repository for cash being accumulated for a specific purpose c. As a buffer against bad debt losses d. Answers (a) and (b) e. Answers (a), (b), and (c)

d. Answers (a) and (b)

Which of the following statements best describes the revenue cycle? a. It focuses on cash management. b. It focuses on inventory management. c. It focuses on receivables management. d. It focuses on cash, inventory, and receivables management. e. It focuses on all activities associated with billing and collecting for services.

e. It focuses on all activities associated with billing and collecting for services.

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

false

Moral hazard is the risk that a health insurer will not pay for covered services. True False

False

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

False

Capital rationing is a condition where an organization has fewer acceptable projects than funds needed to undertake those projects. True Flase

False

The corporate cost of capital provides a benchmark for determining a project's cost of capital. In general, projects that are riskier than average must have a cost of capital that is greater than the corporate cost of capital, while projects that are less risky than average must have a cost of capital that is less than the corporate cost of capital. True False

True

The primary goal of not-for-profit corporations generally is expressed in a mission statement that often involves service to the community. True False

True

The role of finance in healthcare organizations has increased in importance over time because the finance function must support a multitude of activities such as cost containment, payer negotiations, joint venture activities, and system participation. True False

True

There are several types of managed care organizations (MCOs). Regardless of type, all MCOs have an incentive to reduce utilization. True False

True

As the discount rate applied to a single amount (lump sum) future value increases, the present value a. Stays the same b. Increases by some amount c. Doubles d. Decreases

d. Decreases

Which of the following would most likely appear as a liability on the balance sheet of a healthcare organization? a. Interest payments made by the healthcare organization on an outstanding loan. b. The outstanding balance on a loan taken by the healthcare organization. c. Salaries owed to employees but not paid as of the balance sheet date. d. The value of investments in stocks and bonds owned by the healthcare organization. e. Answers (b) and (c)

e. Answers (b) and (c)

Which of the following is not a finance activity? Answers: a. Planning/budgeting b. Financing decisions c. Financial reporting d. Financial risk management e. Facilities management

e. Facilities management

Which of the following statements about the balance sheet is correct? a. The lower (right-hand) section reports cash and other assets. b. The balance sheet reports on a business's operations. c. The asset side of the balance sheet is listed in decreasing order of maturity (i.e., longer maturity assets are listed first). d. The upper (left-hand) section reports liabilities and equity. e. None of the above statements is correct.

e. None of the above statements is correct.

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

false

In economics, the situation in which average cost (per unit of output) declines as volume increases is known as economies of scope. True False

False

Like the income statement, the balance sheet reports the status of an organization over some period. True False

False

Long-term debt is defined as having a maturity of more than six months. True False

False

As stated in the text, the four Cs (character, capability, charisma, and courtesy) summarize the attributes needed to be a good financial manager. True False

False

From a financial perspective, businesses and pure charities are identical (operate in a similar fashion). True False

False

A business's float is maximized by accelerating disbursements and slowing receipts. True False

False

A liquid investment is an investment, like an old MRI machine, that can be sold quickly and at a fair price. True False

False

Accounting rules and regulations provide an exact answer to every accounting question, leaving no opportunity for negotiation, compromise, or interpretation in the preparation and presentation of financial statements.That's why we have rules and regulations. True False

False

An example of a consigned inventory system is when a hospital relies on an outside contractor for supplies. True False

False

The best way to incorporate inflation effects in a project's cash flows is to assume neutral inflation- that is, to assign the same rate of inflation to all cash flows. True False

False

Which of the following equations best describes the accounting identity? a. Long-term assets = Short-term assets + Equity. b. Assets = Liabilities + Equity. c. Total claims = Liabilities + Equity. d. Short-term assets = Cash + Receivables. e. Long-term liabilities = Notes + Bonds.

b. Assets = Liabilities + Equity.

From a provider's perspective, which of the following third-party payment methods has utilization risk? a. Charge based b. Capitation c. Per diem d. Diagnosis (DRG) based e. Cost based

b. Capitation

Which of the following statements about equity is correct? a. Equity represents the amount of cash available to the organization. b. Equity is the residual claim against assets after all liabilities have been paid off. c. Equity claims are paid before liability claims if a healthcare organization is liquidated. d. Equity always must be positive. e. The balance of an organization's equity as of a given date is shown on the organization's income statement.

b. Equity is the residual claim against assets after all liabilities have been paid off.

the internal rate of return of a capital investment: a. Changes when the cost of capital changes b. Must exceed the project cost of capital to make the investment financially acceptable c. Measures the dollar profitability of a project d. Must be less than the project cost of capital to make the investment financially acceptable e. Measures the length of time it takes a business to recover its initial investment in the project

b. Must exceed the project cost of capital to make the investment financially acceptable

Which of the following statements about cost allocation is (are) correct? a. The direct method is conceptually best and least expensive to implement. b. The reciprocal method is most widely used in practice. c. The reciprocal method is conceptually best, but typically the most expensive to implement. d. Answers (a) and (b) are correct. e. Answers (b) and (c) are correct.

c. The reciprocal method is conceptually best, but typically the most expensive to implement

Which of the following statements about healthcare providers is is not correct? a. Traditional outpatient settings include clinics, medical practices, hospital outpatient departments, and emergency rooms. b. Long-term care includes healthcare and personal care services. c. There are many more hospitals than there are nursing homes, but nursing homes tend to have a greater number of beds. d. One of the hypothesized benefits of integrated delivery systems is patient capture. e. Over the last 30 or so years, there has been substantial growth in nontraditional ambulatory care settings, such as outpatient surgery centers, urgent care centers, and diagnostic imaging centers.

c. There are many more hospitals than there are nursing homes, but nursing homes tend to have a greater number of beds.

Which of the following statements about the legal forms of for-profit business organization is correct? a. Corporations are much easier to form than are proprietorships. b. Partnerships are applicable only when there are more than three owners, while proprietorships are used only when there are three or fewer owners. c. Corporations have the advantage of limiting liability to owners. d. Hybrid forms of business can never be used by healthcare organizations. e. Corporations' income tax structure is superior, and hence they typically are more tax efficient than are proprietorships or partnerships.

c. Corporations have the advantage of limiting liability to owners.

Which of the following operating metrics is used to monitor labor productivity? a. Profit per discharge b. Length of stay c. Full-time equivalents per occupied bed d. Medicare percentage e. Outpatient revenue percentage

c. Full-time equivalents per occupied bed

Which of the following statements about activity-based costing is correct a. It uses a top-down approach to cost allocation. b. It is most useful for assigning costs to departments. c. It is most useful for assigning costs to individual services. d. It is easy to apply because it ignores overhead costs. e. It is less costly to implement than traditional costing methods.

c. It is most useful for assigning costs to individual services.

Which of the following statements about the income statement is correct? a. It has several alternative names, including "statement of liabilities." b. It reports the financial status of an organization as of a single point in time. c. It reports the economic profitability of an organization. d. Its three major sections are operating costs, nonoperating costs, and total (net) costs. e. Income statements are always prepared annually, but never for shorter periods (e.g., quarterly).

c. It reports the economic profitability of an organization.

Which of the following statements about coding is not correct? a. Coding is the first step in the reimbursement process. b. ICD codes are used to classify diseases and injuries. c. CPT codes are used to specify medical procedures (treatments). d. Coders typically are registered nurses who receive special training. e. Codes typically are assigned on the basis of a clinician's notes.

d. Coders typically are registered nurses who receive special training.

Which of the following statements about hospitals is correct? a. Patients at general acute care hospitals typically have long patient stays, often 30 or more days. b. The number of specialty hospitals has declined over the last three decades. c. The optimal size for a hospital is roughly 50 beds. d. The majority of hospitals are public or not for profit (as opposed to investor owned). e. Most physicians involved in hospital services are hospital employees.

d. The majority of hospitals are public or not for profit (as opposed to investor owned).

Which of the following statements about finance, accounting, and financial management is correct? a. Accounting is of no value in decision making. b. Accounting provides the theory to help managers make better decisions. c. Financial management involves the measurement of billing procedures. d. The primary role of finance is to plan for, acquire, and use resources to maximize the efficiency and value of the enterprise. e. Financial management is of no value in decision making.

d. The primary role of finance is to plan for, acquire, and use resources to maximize the efficiency and value of the enterprise.

Which of the following statements about investor-owned (for-profit) corporations is not correct? a. Investors can become owners of a company by purchasing shares of stock. b. Owners have a claim on the business's residual earnings. c. Owners exercise control by voting for the board of directors (by the proxy mechanism). d. When an individual sells his or her stock, the company receives the proceeds from the sale. e. An investor (owner) cannot lose more than the amount of his or her investment.

d. When an individual sells his or her stock, the company receives the proceeds from the sale.

Which of the following techniques is (are) used to interpret operating metrics? a. Trend analysis b. Comparative analysis c. Scale analysis d. Answers (a) and (b) e. Answers (a), (b), and (c)

d. Answers (a) and (b)

Effective cost drivers should have which of the following characteristics? Answers: a. They should be perceived as fair. b. They should create an incentive for cost reduction. c. They should create an allocation rate based on patient revenues. d. Answers (a) and (b) are correct. e. Answers (a) and (c) are correct.

d. Answers (a) and (b) are correct.

Which of the following statements about project classifications is (are) correct? a. Projects are classified by purpose, such as replacement. b. Projects are classified by size, such as less than $1 million. c. Projects are classified by life, such as less than five years. d. Answers (a) and (b) are correct. e. Answers (a), (b), and (c) are correct.

d. Answers (a) and (b) are correct.

Which of the following statements about the organization of the balance sheet is (are) correct? a. The balance sheet has upper and lower (or left and right) sections. b. Assets are divided into current and long-term categories. c. Assets are divided into equity and semi-equity categories. d. Answers (a) and (b) are correct. e. Answers (a) and (c) are correct.

d. Answers (a) and (b) are correct.

Which of the following statements about regulatory and legal issues is correct? a. Licensure of certain healthcare providers is intended to limit the number of providers. b. The goal of certificate of need (CON) regulation is to ensure there are a sufficient number of workers at each hospital and nursing home. c. Clinicians who are employees of hospitals do not require personal licenses because they can practice under the hospital's license. d. Most providers' primary legal concern is professional liability. e. Healthcare managers must grapple with legal issues at all times, but not ethical issues.

d. Most providers' primary legal concern is professional liability.

Assume Mercy Hospital uses accrual accounting. Which of the following statements is (are) correct? a. Supplies expense is recognized when medical supplies are delivered to the hospital by the vendor. b. Patient service revenue is recognized when payment is received by the hospital from a patient's third-party payer. c. Salaries expense is recognized when payroll checks are written. d. Patient service revenue is recognized when healthcare services are provided. e. Answers (a), (c), and (d) are correct.

d. Patient service revenue is recognized when healthcare services are provided.

Which of the following individuals are not stakeholders in not-for-profit corporations? a. Suppliers b. Patients c. Managers d. Stockholders e. Employees

d. Stockholders

Which of the following statements about project cash flow estimation is not correct? a. Inflation effects should be included. b. The effects on a business's other projects should be included. c. Opportunity costs should be included. d. Sunk costs should be included.

d. Sunk costs should be included.

Which of the following statements concerning financial risk is not correct? a. Risk requires the possibility of at least one return less favorable than the expected return. b. Risk requires the possibility of more than one return. c. Risk is one of the determinants of the project cost of capital (discount rate). d. The higher the risk, the lower the project cost of capital (discount rate).

d. The higher the risk, the lower the project cost of capital (discount rate).

Which of the following statements about healthcare reform is not correct? a. Healthcare reform is a generic term primarily used to describe the features of the Patient Protection and Affordable Care Act (ACA). b. Because many of the features are phased in over time, the full impact will not be known until several years after passage. c. Most of the provisions of the ACA involve insurance reform as opposed to provider reform. d. Some provisions of reform (new taxes, fees, and cost-saving measures) are designed to offset the costs of other provisions. e. Although reform provisions affect private insurers; they do not affect the major government programs of Medicare and Medicaid.

e. Although reform provisions affect private insurers; they do not affect the major government programs of Medicare and Medicaid.

Which of the following factors influence(s) the estimate of a business's optimal capital structure? a. The amount of business (inherent) risk b. Lender/rating agency attitudes c. Industry averages d. The need to maintain financial flexibility (reserve borrowing capacity) e. All of the above

e. All of the above

The revenue cycle is composed of: Answers: a. Before-service activities b. At-service activities c. After-service activities d. Monitoring and reporting activities e. All of the above activities

e. All of the above activities

Which of the following statements about the Medicare payment system for hospital inpatient care (IPPS) is(are) correct? a. The basis for payment is the patient's diagnosis as specified by diagnosis-related group (DRG). b. The DRG payment is adjusted for severity. c. Payments are increased for patients with very high costs (outliers). d. Payments are adjusted for the hospital's local conditions (wage rates). e. All of the above statements are correct.

e. All of the above statements are correct.

To be workable, insurance must have which of the following characteristics? a. Pooling of losses b. Payment only for random losses c. Risk transfer d. Indemnification e. All of the above.

e. All of the above.

Basic sources (forms) of capital include which of the following? a. Debt b. Equity c. Leases d. Convertible bonds e. Answers (a) and (b)

e. Answers (a) and (b)

A business's set of financial statements includes which of the following items? a. Income statement b. Balance sheet c. Statement of cash flows d. Answers (a) and (b) e. Answers (a), (b), and (c)

e. Answers (a), (b), and (c)

Which of the following inventory management techniques is (are) currently used by healthcare providers a. Just-in-time systems b. Stockless systems c. Consigned inventory systems d. Answers (a) and (b) e. Answers (a), (b), and (c)

e. Answers (a), (b), and (c)

Which of the following statements about the post-audit is (are) correct? a. It may improve forecasts. b. It may improve operations. c. It may reduce losses. d. Answers (a) and (b) are correct. e. Answers (a), (b), and (c) are correct

e. Answers (a), (b), and (c) are correct

Which of the following statements about payback (payback period) are correct? a. Payback is a measure of time to breakeven. b. Payback is a rough measure of risk. c. Payback is a rough measure of liquidity. d. Answers (a) and (b) are correct. e. Answers (a), (b), and (c) are correct.

e. Answers (a), (b), and (c) are correct.

Although sensitivity analysis has its limitations with regard to project risk assessment, it is useful for identifying cash flow components that are most critical to the analysis (i.e., have the largest impact on profitability). True False

true