HS 345 Final Exam
What is the difference between net income and cash flow?
Cash flow = Net income + Depreciation
What are the three primary bond rating agencies?
Fitch Ratings, Moody's Investors Service (Moody's), and Standard & Poor's (S&P).
What is cost-volume-profit (CVP) analysis? Why is it so useful to health services managers?
It is useful to health service managers because the information helps them evaluate future courses of action regarding pricing and the introduction of new services.
Briefly describe the major third-party payers.
Private Insurers: Blue Cross/Blue Shield, commercial insurers, and self-insurers. Public Insurers: Medicare & Medicaid (government health insurance)
What are the primary characteristics of managed care plans?
The combination of healthcare services and the insurance function into a single entity.
Why are tax laws important to healthcare finance?
They have implications for financial management including organizational goals, financing decisions, and capital investment decisions.
Total cost are made up of what components?
Total fixed costs and total variable costs
Municipal bond
a tax-exempt bond issued by a governmental entity such as a healthcare financing authority. Municipal bonds typically are used to finance capital projects and are issued by states and their political subdivisions, such as counties, cities, port authorities, and toll road or bridge authorities.
Why are bond ratings important to investors? Why are ratings important to businesses that issue bonds?
A bonds rating is an indicator of its default risk, so the rating has a direct, measurable influence on the interest rate required by lenders and hence on the firm's cost of debt capital. Most corporate bonds are purchased by individual investors rather than by individuals and many of these institutions are restricted to investment-grade securities. Most individual investors who buy municipal bonds are unwilling to take high risks, so if an issuer's bonds fall below BBB, new bonds will be harder to sell because the number of potential purchasers is reduced.
What are the critical differences in a profit analysis when conducted in a capitated environment verses a fee-for-service environment?
A capitated environment vs. a fee-for-service environment have critical differences in profit analysis. Mainly, a capitated provider takes on the insurance function.
What is a Cost Driver?
A cost driver is the criterion upon which the allocation is made; for example, square footage for facilities costs.
What is a Cost Pool?
A cost pool is a group of overhead costs to be allocated; for example, facilities costs.
What makes a liability a current liability? Provide examples.
A current liability must be paid within one accounting period. Accounts payable to a vendor for supplies, wages and benefits, taxes, interest due on debt, and utilities.
What cost structure is best when a provider is primarily capitated? Explain.
A fixed cost structure would be best because if annual fixed revenue exceeds annual fixed costs a clinic is guaranteed profit.
What is Form 990?
A form filed with the IRS that reports on governance and charitable activities.
What is the difference between a lump sum, an annuity, and an unequal cash flow stream?
A lump sum is a single starting amount. An annuity which is a series of equal, periodic payments for a specified number of periods and if an analysis involving more than one lump sum doesn't meet the definition of an annuity it is called an unequal cash flow stream.
What is the difference between a normal yield curve and an inverted yield curve?
A nominal yield curve is an upward sloping curve that would be expected if the inflation premium is relatively constant across all maturities. Conversely, a yield curve that slopes downward is called an inverted yield curve.
Explain the difference between the equity section of a not-for-profit business and an investor-owned business.
A not-for-profit business lists equity as net assets, an investor-owned business lists it as stockholder or shareholder equity.
What is a yield curve? Is it static, or does it change over time?
A plot of the term structure of interest rates (yield to maturity versus term to maturity.) It changes over time
What is a stakeholder?
A stakeholder is an individual who has financial interest in an organization.
What is the statement of cash flows, and how does it differ from the income statement?
A statement of cash flows is a statement that focuses on the details of cash flow into and out of a business. This was developed in response to a demand for better information about a firm's cash inflows and outflows. The statement of cash flows details where a business gets its cash and what happens to it, the income statement isn't this detailed, for instance, there may be cash raised by means other than operations that won't even appear on the income statement.
What cost structure is best when a provider is reimbursed primarily by fee-for-service? Explain.
A variable cost structure is best because each visit would incur cost but at the same time create revenue.
What is the difference between an A-rated bond and a B-rated bond?
A's have a higher rating which means they have a lower probability of going into default while BB and lower bonds are more speculative because they have a higher probability of going into default.
Describe provider incentives and risks under each of the following reimbursement methods:
A: Cost-based: providers given a "blank check" to acquire facilities and equipment and incurring operating costs. Services that may not truly be needed will be provided to make more money. Least risky. B: Charge-based (Including discounted charges): incentive to set high charge rates which leads to high revenues. Cost-of-service risk. C: Per procedure: incentive to perform procedures that have the highest profit potential and the more procedures the better. D: Per diagnosis: incentive to seek patients with those diagnoses that have the greatest profit potential and discourage those that don't. Additionally, is an incentive to upcode procedures or diagnoses to ones that provide the greatest reimbursement. E: Per Diem: incentive to increase length of stay. Bears the risk that costs associated with the service provided on any day exceed the per diem rate. F: Bundled payment: forces physicians and hospitals to jointly offer the most cost-effective treatment. Risk for intensity of services. G: Capitation: incentive to reduce both costs and utilization. Short-term utilization risk.
What is the difference between the income statement and balance sheet in regards to timing?
An income statement reports results over a period of time whereas the balance sheet gives a snapshot of the financial standing of an organization at a given point in time.
How do investors interpret bond ratings?
An investment grade bond is a bond with a BBB or higher rating, a junk bond is a bond with a BB or lower rating.
Great Lakes Health Network's net income increased from $3.2 million in 2001 to $6.4 million in 2011. The total growth rate over the ten years is 100 percent, while the annual growth rate is only about 7.2 percent, which is much less than 100 percent divided by ten years. Why is the annual growth less than the total growth rate divided by ten? Which growth rate has more meaning—the total rate over ten years or the annualized rate?
Annual growth rate is less because it is dividing total growth rate into how many years it has been. The annual rate has more meaning because it is the average growth over the 10 years.
What are assets? What are the three major categories of assets?
Assets either possess or create economic benefit for an organization. Current Assets: cash and other assets that are expected to be converted into cash within one accounting period. (typically a year) Long-Term Investments: securities whose maturities exceed one year. Represents investments in financial assets which are securities such as stocks or bonds, that represent a claim on a business's cash flows. Net property and equipment: These are a business's fixed assets such as land, buildings, and equipment.
Why is net income called "The bottom line"
Because of its location on the income statement and its importance.
What is price risk?
Bondholders face price risk because bond values change when interest rates change. An investor's exposure to price risk depends on the maturity of the bonds.
What is reinvestment rate risk?
Bondholders face reinvestment rate risk when the investment horizon exceeds the maturity of the bond issue.
What do bond ratings measure?
Bonds and other types of debt have been assigned quality ratings that reflect their probability of going into default.
What are the weaknesses of the CAPM?
CAPM is based on a restrictive set of assumptions that does not conform well to real-world conditions and although the concepts are logical, the entire theory is based on expectations, while only historical data are available to implement the theory.
What is the difference between fee-for-service reimbursement and capitation?
Capitation is a reimbursement method that is based on the number of covered lives as opposed to the amount of services provided.
Explain the difference between cash and accrual accounting. Be sure to include a discussion of the revenue recognition and matching principles.
Cash accounting are recognized when the financial transaction occurs-the actual flow of money into and out of a business. Accrual accounting records economic events when a transaction takes place regardless of whether or not cash is exchanged. Both the revenue recognition and matching principles fall under the accrual accounting because those are the principles that require you to match expenses to the time period that they're incurred and revenues are recognized as they are earned not only when money is received. GAAP requires businesses to use accrual accounting. to show better picture of financial status.
What are the three major sections of the statement of cash flows?
Cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.
What is the difference between charity care and bad debt losses? How is each handled?
Charity care is provided to those who do not have the ability to pay and, therefore, those funds are not expected to be collected. Bad debt loss is revenue that is expected, but never collected, from payers who have the capacity to pay. Charity care is not reported on the income statement. Bad debt losses are reported as an operating expense on the income statement.
When considering stand-alone risk, the return distribution of a less risky investment is more peaked ("tighter") than that of a riskier investment. What shape would the return distribution have for an investment with (a) completely certain returns and (b) completely uncertain returns?
Completely certain return would be a vertical spike and a completely uncertain return would be a horizontal line.
Define contribution margin. What is its economic meaning?
Contribution margin is the difference between per-unit revenue and per-unit variable cost. Its economic meaning is to contribute available profits after an organization's fixed costs are covered.
What are the two types of portfolio risk? How is each type defined? How is each type measured?
Corporate risk is the portion of the riskiness of a business project that cannot be diversified away by holding the project as part of the business's portfolio of projects. It is measured by a project's corporate beta, which reflects the volatility of the project's returns relative to the volatility of the aggregate business. Market risk is the portion of the riskiness of a business project that cannot be diversified away by holding the stock of the company as a part of diversified portfolio. It is measured by a project's or stock's market beta, which reflects the volatility of a project's (or stock's) returns relative to the volatility of returns on a well-diversified stock portfolio.
What condition must be present for the portfolio to have lower risk than the weighted average of the two investments? Is it possible for the portfolio to have lower risk than that of either investment? Is it possible for the portfolio to be riskless? If so, what condition is necessary to create such a portfolio?
Correlation (r) is less than positive 1 Yes, it is possible if Correlation (r) = -1 Yes, if you increase the probability of gains it is possible to eliminate risk.
What is credit enhancement?
Credit enhancement, or bond insurance, is insurance that guarantees the payment of interest and repayment of principal on a bond even if the issuing company defaults.
What is cross-subsidization (price shifting)? Is it as prevalent today as it has been in the past?
Cross subsidization is a process in which the entity charges higher prices to one group of consumers in order for them to be able to subsidize lower prices to another group. Cross-subsidization is as prevalent as it has been in the past but is used differently. In the past price shifting was used by providers to support services that were not self-supporting. More recently, price shifting has been used to subsidize governmental payers, primarily Medicaid.
What medical coding systems are used to support fee-for-service payment methodologies?
Current Procedural Terminology (CPT) codes.
What is depreciation expense, and what is it purpose?
Depreciation expense is an accounting reflection of the cost of fixed assets.
What are the Primary differences between direct and indirect costs?
Direct costs are the unique and exclusive costs of a single unit of an organization, such as the labor costs of one department. Indirect costs, in contrast, are inherently difficult to measure because they involve shared resources of the organization as a whole, such as general administration costs.
Effective cost drivers, and hence the resulting allocation system, must have what two important attributes?
Effective cost drivers must possess two important attributes. The first is fairness—that is, does the cost driver result in an allocation that is fair to the patient services departments? The second attribute is cost control—that is, does the cost driver chosen create incentives for departments to use less of that overhead service?
What three major advantages do tax laws give to not-for-profit corporations?
Exempt from taxation, the right to issue tax-exempt debt, and access to tax-subsidized contribution capital.
What is meant by the term expense?
Expenses are the economic costs associated with the provision of services.
What three factors primarily influence the general level of interest rates?
Federal Reserve policy Federal budgetary policy The level of economic activity.
Compare and contrast the following three methods for developing capitation rates: fee-for-service approach, cost approach, and demographic approach.
Fee-for-service: a technique that uses utilization forecasts and fee-for-service prices to set premium rates. Cost approach: uses utilization forecasts and underlying costs to set premium rates. Demographic approach: uses population demographics and costs to set premium rates.
Explain the differences between fixed cost, semi-fixed costs, and variable cost.
Fixed costs: a cost that is not related to the volume of services delivered. Example: expenditures on assets like facilities, information systems, and equipment. Semi-fixed costs: a cost that is fixed at two or more values within the relevant range. Example: relevant range is 10,000 to 20,000 tests, but the current workforce can only handle 15,000, so an additional technician would be required if volume exceeds that level. Semi-fixed costs are fixed within ranges of volume, but there are multiple ranges of semi-fixed costs within the relevant range. Variable costs: costs directly related to volume. Example: cost of clinical supplies The main idea is that some costs are more or less predictable because they are independent of volume, while other costs are less predictable because they are related to volume.
Explain the essential differences between full cost and marginal cost pricing strategies.
Full cost pricing permits businesses to recover all costs including both fixed and variable cost, while marginal cost pricing recovers only variable costs. In full cost pricing the full cost of a service must include the following: (1) the direct variable costs of providing the service, (2) the direct fixed costs, (3) the appropriate share of the overhead expenses of the organization, and (4) a profit component.
What is fund accounting, and why is it important to some healthcare providers?
Fund accounting is a system for recording financial statement data that categorizes accounts as restricted or unrestricted. This type of accounting is only applicable to not-for-profit organizations. It is important to some healthcare providers because it allows the use of unrestricted funds for the development, growth, and diversification of the organization.
What is the difference between gross revenues and net revenues? (Hint: Think about discounts and charity care)
Gross: total revenue received before any deductions or allowances, such as for discount charity care, bad debt, cost of good sold, taxes, etc. Net: total revenue received after any deductions or allowances.
Describe the different types of managed care plans.
HMO: in general, services are not covered if beneficiaries bypass their gatekeeper physician or use providers that are not part of the HMO. PPO: do not mandate the use of specific providers and don't use preselected gatekeeper physicians. Do not assume any responsibility for quality assurance.
What impact does the yield curve have on debt financing decisions?
Health services managers use yield curve information to help make decisions regarding debt maturities. The optimal financing policy depend in an important way on the maturities of the firm's assets: in general, to reduce risk, managers try to match the maturities of the financing with the maturities of the assets being financed.
Are financial conditions more closely related to net income or to cash flow?
I think they are more closely related to net income because net income attempts to measure a business's economic long-term profitability.
If you were the CEO of Bayside Memorial Hospital, would you advocate a top-down or bottom-up approach to budgeting? Explain your rationale.
I would advocate a bottom-up approach to budgeting because in a bottom-up approach, department managers develop the budgets. I think that this approach is advantageous because the managers and employees will be more committed to sticking to the budget that they helped create.
Would you rather have a savings account that pays 5 percent compounded semiannually or one that pays 5 percent compounded daily? Explain your answer.
I would rather have a savings account that pays 5% compounded daily because interest is earned with every compounding period.
What would happen financially to a health services organization over time if its prices were set at a. Full costs b. Marginal costs
If a health service organization set its prices to full costs, that organization would be financially healthy because it would be charging enough to cover both its variable and fixed costs. If a health service organization set its prices to marginal costs that organization would only make enough money to cover its variable costs and wouldn't recover its total costs which would ultimately cause the organization to fail.
What is operating leverage? How is it measured?
If a high proportion of a business's total costs are fixed, the business is said to have high operating leverage. In finance, high operating leverage means that a relatively small change in volume results in a large change in profit. It is measured by the degree of operating leverage (DOL) which is calculated at any volume by dividing the total contribution margin by profit.
What are the implications of portfolio theory for investors?
Implications include that holding a single investment is not rational and that because an investment held in a portfolio has less risk than one held in isolation, the traditional stand-alone risk measure of standard deviation is not appropriate for investments held in portfolios.
Explain the concept of return on investment (ROI) and the two different approaches to measuring ROI.
In most investments an individual or a business spends cash today with the expectation of receiving cash in the future and ROI is a way to measure the attractiveness of such investments. There are two approaches to measuring ROI: the dollar return and the percentage return.
What is the role of information systems in pricing decisions?
Information systems provide the organization with the information that is needed to set their prices. It provides information about utilization forecasts and population demographics that allow organizations to make pricing decisions.
What are some other categories of expenses?
Insurance billing, research, academics, labor costs, liability costs, practice supplies.
Wha is the primary goal of investor-owned corporations and of most not-for-profit corporations?
Investor-Owned: Shareholder wealth maximization or stock price maximization. Managers are interested in their own personal welfare, that of their employees' and in the good of the community and society at large. Not-for-profit: the primary goal is stated in terms of a mission statement.
What stakeholders are the most interested in the financial conditions of a healthcare provider?
Investors and managers (including board of directors or trustees).
What makes an asset a current asset? Provide examples.
It is a current asset because cash and other assets that are expected to be converted into cash within one accounting period. Cash, short-term investments, net patient accounts receivable
What is an opportunity cost rate? How is this rate used in time value analysis? Is this rate a single number that is used in all situations?
It is the rate that could be earned on alternative investments of similar risk. You can't invest in all opportunities using the same pool of funds so you have to figure out a discount rate that reflects the return you could have made if you chose one of the other investment opportunities. The opportunity cost rate to be applied in time value analysis is the rate that could be earned on alternative investments of similar risk. The primary determinant of this rate is the riskiness of the cash flows being discounted. Thus, it is not a specific single number used in all situations.
What is the difference between liabilities and equity?
Liabilities represent claims against the assets of an organization that are fixed by contract. Equity is the amount of total assets financed by nonliability capital, or total assets minus total liability. The equity section of the balance sheet reflects the ownership status of the organization.
What is the difference between long-term debt and notes payable?
Long-term debts is debt with maturities of more than one accounting period, and hence does not require repayment during the coming year. Notes payable is also known as short-term debt and is paid off in one accounting period.
What is net working capital, and what does it measure?
Net working capital is the difference between total current assets and total current liabilities. It is a measure of liquidity.
Can most providers be classified strictly as either a price setter or a price taker?
No, most providers cannot be classified strictly as either a price setter or a price taker because most can be a price takers for some services and price setters for others. An example would be a provider that holds a large market share in a rural area, they can be price setters for certain things, but with reimbursement form Medicare or Medicaid that provider is still a price taker, because they have no say in that particular reimbursement.
What are the primary differences between investors-owned and not for profit corporations?
Not-for-profit corporations have no shareholder's, rather, control is exercised by a board of trustees that is not constrained by outside oversight. In addition, not-for-profit corporations are generally exempt from taxation, both property and income.
Which is the better cost driver for the cost of a hospital's financial services department: patient services, department revenues, or numbers of bill generated? Explain your rationale.
Number of bills generated would be the best cost driver for the hospital's financial services department. Because associated costs with generating bills includes labor hours and administrative costs, increases or decreases in the volume of bills generated will have an impact on the cost allocation rate.
What is the difference between operating income and net income?
Operating income focuses on the profitability of patient services, while net income represents the total economic profitability of a business as defined by GAAP.
What organizational characteristics create likely candidates for zero-based budgeting?
Organizations that are concerned with implementing cost-control efforts on a continuous basis like health services organizations are likely to be candidates for zero-based budgeting.
What is the difference between patient service revenue and other revenue?
Patient services revenue is made directly from patients while other revenue includes things such as parking fees, non-patient food services, etc.
Why are planning and budgeting so important to an organization's success?
Planning is so important to an organization's success because it involves preparing for the future. Budgeting ties together planning and control functions and ensures that current performance of a business is consistent with the organizational goals and plans.
Using a hospital to illustrate your answer, explain the difference between a price setter and a price taker.
Price takers are healthcare providers that have to accept more or less the prices set in the marketplace for their services, including the prices set by governmental insurers. Price setters are healthcare providers who have market power or whose services can be differentiated from others such as by quality or convenience and hence have the ability to set the prices on some or all of their services.
The four fundamental factors that affect the supply of and demand for investment capital—which affect interest rates—are productive opportunities, time preferences for consumption, risk, and inflation. Explain how each of these factors affects the cost of money.
Productive opportunities: affects the borrower's ability to pay for borrowed capital. The higher the profitability of the business, the higher the interest rate that debtor can afford to pay lenders for use of their savings. Time preferences for consumption: affects the interest rate and high or low it will be depending on why the person needs the money. If they need it immediately, they would be considered to have a high time preference for consumption vs. low. Risk: the higher the risk, the higher the interest rate Inflation: the higher the expected rate of inflation, the higher the interest rate demanded by savers.
On the balance sheet, what is the difference between long-term investments and property and equipment?
Property and equipment are fixed assets such as land, buildings, and equipment while long-term investments are financial assets such as stocks and bonds.
What are the three forms of business organization? Describe their advantages
Proprietorship: a simple form of business owned by a single individual. Advantages: easily and inexpensively formed, subject to few governmental regulations, and pays no corporate income taxes. Partnership: a nonincorporated business entity that is created by two or more individuals. Advantages: low cost, easy formation, earnings taxed as personal income. Corporation: a legal business entity that is separate and distinct from its owners (or community) and managers. Advantages: unlimited life that can continue in existence after original owners and managers have died or left the company, easy to transfer ownership because of stock, and owners have limited liability.
The interest rate required by investors on a debt security can be expressed by the following equation: Interest rate = RRF + IP + DRP + LP + PRP + CRP. Define each term of the equation, and explain how it affects the interest rate.
RRF: real risk-free rate is the rate of interest on a riskless investment in the absence of inflation. IP: inflation premium is the premium that debt investors add to the RRF interest rate to compensate for inflation. This is built into the interest rate and is equal to the expected inflation rate over the life of the security. DRP: default risk premium is the premium that creditors demand for bearing default risk. The greater the default risk, the higher the default risk premium. LP: if a security is illiquid, investors will add a liquidity premium (LP) when they set their required interest rate. In simple terms, it is added to compensates for the lack of liquidity. PRP: price risk premium is directly tied to the term maturity and must be included in the interest rate. The effect of PRPs is to raise interest rates on long-term bonds relative to those on short-term bonds. CRP: to compensate for bearing call risk, investors charge a call risk premium on callable bonds. The amount depends on such factors as the interest rate on the bond, current interest rate levels, and time to first call (the call deferral period).
Define relative value unit (RVU). Explain how RVUs can be used to set prices on individual services.
Relative value unit (RVU) measures the amount of resources required to provide a particular service. RVUs can be used to set prices by measuring the amount of resources that are used by a service. It reflects the cost of the resources used to provide the service.
What is risk aversion? Why is it so important to financial decision making?
Risk aversion is the tendency of individuals and businesses to dislike risk. Given two investments with similar returns but different risk, investors will favor the lower-risk alternative. Investors will require higher returns on higher-risk investments. These behavioral outcomes of risk aversion have a significant impact on many facets of financial decision making.
What is scenario analysis as applied to pricing and service decisions?Why is it such an important part of the process?
Scenario analysis involves examining alternative outcomes in addition to the base case. It's important because it allows managers to assess the impact of changing assumptions in key variable values.
Under what circumstances is each type of risk—stand alone, corporate, and market—most relevant?
Stand-alone risk is most relevant to investments held in isolation; corporate risk is most relevant to projects held by not-for-profit firms and by small owner-managed for-profit businesses; and market risk is most relevant to projects held by large investor-owned corporations.
Briefly Describe the main provisions of healthcare reform and its implications for the practice of healthcare finance.
States will have the option to expand Medicaid eligibility, insurance premiums will be subsidized, there will be incentives for businesses to provide healthcare benefits, insurance companies can't deny coverage based on preexisting conditions, health insurance exchanges will be established, and financial support for medical research will be provided.
Stock A has an expected rate of return of 8 percent, a standard deviation of 20 percent, and a market beta of 0.5. Stock B has an expected rate of return of 12 percent, a standard deviation of 15 percent, and a market beta of1.5. Which investment is riskier? Why? (Hint: Remember that the risk of an investment depends on its context.)
Stock B is risker because it has more Beta.
What is target costing?
Target costing takes the prices paid for healthcare services as a given and then determines the cost structure necessary for financial survival given the prices set. This process forces managers to recognize that the market, rather than the provider, is setting prices.
Explain the difference between portfolio risk and diversifiable risk.
That portion of the stand-alone risk of an investment that can be eliminated by holding the investment in a portfolio is called diversifiable risk while the risk that remains because it cannot be eliminated by diversification is called portfolio risk.
What is the accounting identity? What is the implication of the accounting identity for the numbers on a balance sheet?
The accounting identity is the relationship that says the left side must equal the right side. The equation form is A = L+E where A = Total assets, L = Total liabilities, and E = Equity. The implication is that the numbers must balance.
How is the cost allocation rate determined?
The allocation rate is determined when the cost pool is divided by the cost driver.
What is wrong with this statement: "The clinic's cash balance for 2011 was $150,000, while its net income on December 31, 2011 was $50,000."
The balance sheet is a snapshot of a given point in time, so it can't give results that span throughout the year.
What is the bottom line of the statement of cash flows, and how important is it?
The bottom line of the statement of cash flows is the net increase (decrease) in cash. It is a sum total of the three major sections. This number doesn't hold much importance because it can be easily manipulated. If an organization is losing cash on operations, but its managers want to report an increase in the cash amount, in most cases they can simply borrow the funds necessary to show a net cash increase.
What is the capital asset pricing model (CAPM)? The security market line (SML)?
The capital asset pricing model (CAPM) is an equilibrium model that describes the relationship between market risk and required rates of return. The security market line (SML) provide the actuall risk/required rate of return relationship. The required rate of return on any stock is equal to the risk-free rate plus the market risk premium times the stock's market beta coefficient.
Describe the components of a financial plan.
The components of a financial plan are the long-term plan, a working capital management plan, and a managerial accounting plan. The long-term plan provides an overview of the financial future of the company. The working capital management plan provides guidance for short-term financial operations and the managerial accounting plan provides financial goals at the micro level and is used to control operations through comparisons with actual results.
What are the advantages and disadvantages of conventional budgeting versus zero-based budgeting?
The conventional approach uses the previous budget as the basis for constructing the new budget whereas zero-based budgeting begins each budget as a clean slate, and all entries have to be justified each budget period. The advantage of zero-based budgeting over conventional budgeting is that it is more accurate and considered superior over conventional budgeting. The disadvantage is that it is more time consuming and requires greater managerial resources.
Briefly describe the format of the income statement.
The core components of the income statement are revenues, expenses, and profitability. It lists the organization's revenues and income, the expenses that must be incurred to produce the revenues, and the differences between the two. Thus, income statements typically list those components in that order.
How does depreciation expense on the income statement relate to accumulated depreciation on the balance sheet?
The depreciation reported on the balance sheet is the cumulative total amount of depreciation that has been reported as expense on the income statement.
What is the difference between gross fixed assets and net fixed assets?
The difference is calculated as gross fixed asset less accumulated depreciation. Net fixed asset represents the book value of the asset whereas gross fixed asset represents the historical value of the asset.
Assume that two investments are combined in a portfolio. In words, what is the expected rate of return on the portfolio?
The expected rate of return on a portfolio is the weighted average of the expected returns on the assets that make up the portfolio, with the weights being the proportion of the total portfolio invested in each asset.
The present value of a perpetuity is equal to the payment divided by the opportunity cost (interest) rate: PV = PMT ÷ I. What is the future value of a perpetuity?
The future value of a perpetuity is undefined because they payments last forever.
What is the goal of cost allocation?
The goal of cost allocation is to assign as many costs of an organization as possible directly to the activities that cause them to be incurred. Costs within a health services organization must be allocated to those departments that generate revenues for the organization (generally patient services departments).
What is the goal of financial accounting?
The goal of financial accounting is to provide information about organizations that is useful to present and future investors and other users in making rational financial and investment decisions. It is the field of accounting that focuses on the measurement and communication of the economic events and status of an entire organization.
Suppose a hospital was offered a capitation rate for a covered population of $40 per member per month (PMPM). Briefly explain how target costing would be applied in this situation.
The hospital would take the $40 and would subtract from it the amount of profit that they desired from the service. That would give them the target cost level. Then they would reduce the cost of the service to that target level.
What is interest rate risk?
The overall risk created by changing interest rates. Taken together, price risk and investment rate risk compose interest rate risk, which stems from the fact that interest rates rise and fall over time.
What is the relationship between net income on the income statement and the equity section on a balance sheet?
The relationship is through retained earning which is a balance sheet account accumulates net income. The reading lists three connections between the balance sheet and the income statement; bad debt expense, depreciation, and the bottom line of the income statement and equity section of the balance sheet.
Explain the difference between the stated rate, periodic rate, and effective annual rate.
The stated rate is the insurance rate stated in a financial contract and does not reflect the effect of any compounding that occurs more frequently than annually. This is where the effective annual rate is used because it is the insurance rate that, under annual compounding, produces the same future value as was produced by more frequent compounding. The periodic rate is the rate per period and equals the stated rate divided by the number of compounding periods per year.
What is the purpose of the statement of changes in equality? What is its basic format?
The statement reports how much of a business's income statement earnings flows to the balance sheet equity account. Net income Equity (net assets), beg. of year Equity (net assets), end of year
Explain the relationships among the static budget, flexible budget, and actual results.
The static budget is prepared at the beginning of the planning period and is the starting point for analyses. The flexible budget is based on static budget but is changed to reflect the actual volume realized in the accounting period. Variance analysis examines the differences between the actual results and the static and flexible budgets.
How are the statistics, revenue, expense, and operating budgets related?
The statistics budget contains the volume and resource assumptions that are used in all of the other budgets. The revenue budget is focused on the revenues of an organization. The expense budget is focused on the costs associated with providing goods and services and the operating budget combines the revenue and expense budgets.
Briefly describe the planning process. Be sure to include summaries of the strategic, operating, and financial plans.
The strategic plan provides broad guidance for the future and is the foundation of any organizations planning process. A more detailed managerial guidance is contained in the operating plan, often called the five-year plan. The financial plan contains a long-term plan, a working capital management plan, and a managerial accounting plan.
What are the three primary methods of cost allocation? What are the differences between them?
The three methods are the direct method, reciprocal method, and step-down method. The key differences between them are how support services provided by one department are allocated to other departments. The direct method does not recognize any services provided by one support depart to another. The reciprocal method recognizes all of the services that departments provide to and receive from other departments and the step-down method recognizes more than the direct method, but less than the reciprocal method.
What is the value of the CAPM?
The value of the CAPM is that it is an important conceptual tool. It focuses on the impact that a single investment has on a portfolio, which in most situations is the correct way to think about risk. Furthermore, it tells us that the required rate of return on an investment is composed of the risk-free rate, which compensates investors for time value, plus a risk premium that is a function of investors' attitudes toward risk bearing in the aggregate and the specific portfolio risk of the investment being calculated.
Explain why holding investments in portfolios has such a profound impact on the concept of financial risk.
The whole nature of risk and how it is defined and measured changes when one recognizes that investments are held not in isolation, but as parts of portfolios.
What are the generally accepted accounting principles (GAAP)? What is the purpose of the GAAP? What organizations are involved in establishing GAAP?
They are a set of objectives, conventions, and principles that constitute a set of guidelines to guide the preparation and presentation of financial statements. The purpose of GAAP is to ensure that financial reporting is consistent from one organization to another. It also ensures the best development and presentation of financial data. These principles have been sanctioned by the Securities and Exchange Commission (SEC), developed by the Financial Accounting Standards Board (FASB), and refined by the American Institute of Certified Public Accountants (AICPA).
What does the accounting identity tell us about a business's equity?
This can tell us that equity represents a residual claim against the total assets of the business and also the fact that equity can be negative.
Is this statement true or false? "The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices." Explain your answer.
This statement is false because long term bonds are more sensitive generally to changes in rates. Bonds represent a series of cashflows (interest payments) over time plus a final payment at maturity and because long-term bonds have more interest payments over time, there is a bigger change to the value when interest rates are changed.
Describe the primary features of accountable care organizations (ACOs) and medical homes. What benefits are attributed to them?
To be effective, an ACO should include primary care physicians, specialists, and typically, a hospital. In addition, it should have the managerial systems in place to administer payments, set benchmarks, measure performance, and distribute shared savings. Supporters of the medical home model claim it will allow better access to healthcare, increase patient satisfaction, and improve health. Characteristics of the medical home model include each patient having a personal physician, whole-person orientation, coordination and integration, quality and safety, enhanced access, and payment methodologies that recognize the added value provided to patients.
Write out and explain the equation for volume break even. What role does contribution margin play in this equation?
Total revenues - Total variable costs - Fixed costs = Profit In accounting breakeven profit is zero, so the equation changes to: (Contribution margin x Volume) = Profit
How does activity-based costing (ABC) differ from traditional costing approaches?
Traditional costing is a top-down approach that first identifies costs at the department level, then assigns the costs to individual services. ABC costing is a bottom-up approach that identifies activities required to provide an individual service, estimates the costs of those activities, and then aggregates those costs. Traditional costing works well for estimating costs at the department level, but its usefulness for estimating the costs of activities within or across departments is limited. Additionally, although it holds great promise for costing and pricing individual services, ABC costing requires more information and is more complex than traditional costing.
Assume that a group practice has both capitated and fee-for-service (FFS) patients. Furthermore, the number of capitated enrollees has changed over the budget period. In order to calculate the volume variance and break it down into enrollment and utilization components, how many flexible budgets must be constructed?
Two flexible budgets would need to be constructed to show the enrollment and utilization components, one for both enrollment and utilization, and one for enrollment.
How do provider incentives differ when the provider moves form a fee-for-service to a capitated environment?
Under capitation, less utilization rather than more utilization enhances profitability, because under capitation each additional visit creates costs without a corresponding increase in revenues.
What is variance analysis?
Variance analysis is an examination and interpretation of differences between what has actually happened and what was planned. If the budget it based on realistic expectations, variance analysis can provide managers with useful information and while it may not provide all of the answers, it does help managers ask the right questions. the goal of variance analysis is to uncover the cause of operational problems so that these problems can be corrected as quickly as possible and avoided, or at least minimized, in the future.
What elements of profit analysis change when a provider moves form a fee-for-service to a discounted fee-for-service environment?
When a provider moves from a fee-for-service to a discounted fee-for-service environment the element of capitated environment dramatically differs.
Under what circumstances should an overhead department be divided into multiple cost pools?
When the service department offers several substantially different services, and the patient services departments use those services in different relative amounts.
When a loan is amortized, what happens over time to the size of the total payment, interest payment, and principal payment?
With an amortized loan the total payment stays the same while the interest payment decreases and the principal payment increases.
Mortgage bond
a bond issued by a business that pledges real property (land and buildings) as collateral. The issuer pledges certain real assets as security for the bond.
Term loan
a contract under which a borrower agrees to make a series of interest and principal payments, on specified dates, to a lender. Long-term debt obtained directly from a financial institution, often a commercial bank.
Subordinated debenture
a debt security that, in the event of bankruptcy, has a claim on assets only after senior debt has been paid off.
Restrictive covenant
a provision in a bond indenture or loan agreement designed to protect creditors from managerial actions that would be detrimental to their best interests.
Call provision
a provision in a bond that gives the issuer the right to call a bond for redemption prior to maturity; that is, the issuer can pay off the bond in its entirety and redeem, or retire, the issue.
Materiality
affects the presentation of financial statements. To keep statements manageable, only entries that are important to the operational and financial status of the organization need to be separately identified.
Cost matching
after revenues have been allocated to a particular accounting period, all expenses associated with producing those revenues should be matched to the same period.
Trustee
an individual or institution, typically a bank, which represents the bondholders and ensures that the terms of the indenture are being carried out.
Debenture
an unsecured bond, and as such, it has no lien against specific property as security for the obligation.
Going concern
assets should be valued on the basis of their contribution to an ongoing business as opposed to their current fair market value.
Accounting entity
defines the specific areas of the business to be included in financial statements.
Full disclosure
financial statements must contain a complete picture of the economic events of the business.
Conservation
if there is uncertainty in data or GAAP, it is best to choose the path that will least likely overstate the situation.
Bond
long-term debt issued by a business or governmental unit and generally sold to a large number of individual investors. A long-term contract under which a borrower agrees to make payments of interest and principal, on specific dates, to the buyer or holder of the bond.
Monetary unit
provides the common basis by which economic events are measured. In the U.S. this unit is the dollar.
What are three techniques for solving time value problems?
regular calculator solution financial calculator solution the spreadsheet solution.
Historical costs
reporting the value of assets based on purchase price rather than fair market value.
Senior & Junior debt
second mortgages are sometimes called junior mortgages or junior liens because they are junior in priority to claims of senior mortgages, or first mortgage bonds.
Accounting period
the amount of time covered by a set of financial statements. Typically a year, but can be other lengths of time.
Revenue recognition
the concept that revenues must be recognized in the accounting period when they are realizable and earned. Generally, this is the period in which the service is rendered.
Indenture
the contract between the issuer and bondholders. A legal document that spells out the rights and obligations of both bondholders and the issuing corporation.
Objectivity
the information reported in financial statements must, to the extent possible, be based on objective, verifiable supporting data.
Consistency
using like guidelines to a single accounting entity over time. Keeps the comparing past statements to present statements as apples to apples not apples to oranges.