What are the advantages and disadvantages of ABC relative to the step-down method of cost allocation?
Part 1: Statement of Operations and Financial Statements
Statement of Operations and Financial Statements
1. List several efforts that have been enacted by payors to control costs.
Explain the ramifications of allowing/disallowing an individual to be able to sue his or her HMO.
2. What are each of the financial statements commonly called in for-profit health care organizations and in not for-profit care organizations?
The following questions relate to the statement of operations of not for-profit health care organizations.
1. What is the analogous for-profit statement called? What are the main sections of the statement of operations?
2. What are revenues gains and other support?
3. What are expenses and losses?
4. Funds released from restricted net assets to unrestricted net assets are presented in what section of the statement of revenue expenses and other activities?
The following questions relate to the statement of changes in net assets.
1. What is the traditional name for this statement?
2. What is the purpose of this statement?
3. What are the main sections of this statement?
4. Discuss the difference between permanently restricted and temporarily restricted net assets.
The following questions relate to the statement of cash flows of a not-profit health care organization.
1. What are its main sections?
2. What is the purpose of this statement?
3. Where in the financial statements would there be important explanatory information?
4. In what financial statement would one identify the purchase of long-term investments?
5. How does the accrual basis of accounting differ from the cash basis of accounting?
Part 2: Accrual vs. Cash Basis Accounting & Balance Sheet
Accrual vs. Cash Base Accounting
1. Explain the difference between the accrual basis of accounting and the cash basis of accounting. What are the major reasons for using accrual accounting?
2. What are the purpose of a journal and a ledger?
Give an example of a contra-asset and explain how it is recorded on the ledger as a transaction.
3. Explain what a prepaid expense is and how it is recorded on the ledger as a transaction.
4. What are the major differences in recording transactions for a for-profit organization versus a not-for-profit or are there any?
5. List and record each transaction for S. Zee Outpatient Clinic under the accrual basis of accounting at December 31 20X1. then develop a balance sheet as of December 31 20X1 and a statement of
operations for the year ended December 31 20X1.
The clinic received a $3000000 of unrestricted cash contribution from the community. (this transaction increases the unrestricted net assets account.)
The clinic purchased $2000000 of equipment. The clinic paid cash for the equipment.
The clinic borrowed $1000000 from the bank a long-term basis
The clinic purchased $1500000 of supplies on credit.
The clinic provided $5500000 services on credit.
In the provision of these services the clinic used $1000000 of supplies.
The clinic received $500000 in advance to care for capacitated patients.
The clinic incurred $2000000 in labor expenses and paid cash for them.
The clinic incurred $1500000 in general expenses and paid cash for them.
The clinic received $4500000 form patients and their third parties in payment of outstanding accounts.
The clinic met $300000 of its obligation to capacitated patients in Transaction g.
The clinic made a $100000 cash payment on the long-term loan.
The clinic also made a cash interest payment of $50000.
A donor made a temporarily restricted donation of $100000 to be used for operations.
The clinic recognized $200000 in depreciation for the year.
The clinic recognized $500000 of patient accounts would not be received.
6. How do capital structure rations and liquidity rations differ in providing insight into an organizations ability to pay debt obligations?
7. Identify and explain two situations where an organization might have increasing activity rations but declining profitability.
Part 3: The Working Capital Cycle and the Cost of Credit
Maximizing Revenue and Expenditures
Explain how the four kinds of float (billing collections transit and disbursement) can be used to maximize the efficiency of incoming revenues and outgoing expenditures? What kinds of policies
can be initiated to facilitate maximum efficiency and why?
The Working Capital Cycle and the Cost of Credit
1. In terms of cash flow what are the stages of the working capital cycle?
2. Describe the two components of a working capital management strategy.
3. What are the two types of unsecured bank loans? Describe each.
4. In the hospitals billing process why is medical records a critical department?
5. Identify the alternatives for investing cash on a short-term basis and discuss the general characteristics of each.
6. List three ways to measure accounts receivable performance.
7. Identify and define two methods to finance accounts receivable.
8. Compute the annual approximate interest cost of not taking a discount using the following scenarios. What conclusion can be drawn from the calculations?
2/10 net 20
2/10 net 30
2/10 net 40
2/10 net 50
2/10 net 60
9. On January 2 20X1 City Hospital established a line of credit with First Union National Bank. The terms of the line of credit called for a $200000 maximum loan with an interest of 11 percent.
Then compensating balance requirement is 15 percent of the total line of credit (with no additional fees charged).
10. What is the effective interest rate for City Hospital if 50 percent of the total amount were used during the year?
11. How would the answer to part of a change if the additional fees were $500?
12. How would the answer to part of a change if the additional fees were $1000?
Part 4:
Rate of Return & Net Present Value
A. When using the IRR approaches when can the internal rate of return be determined simply by dividing the initial outlay by the cash flows?
Will a decision that is based on NPV ever change if it were based on IRR instead?
Why or why not?
Certainty Inflation & Opportunity Cost
B. Is it better to receive money today or money in the future? In your answer be sure to include the principles or certainty inflation and opportunity cost.
Investment Payback Calculation
1. What is the difference between simple interest and compound interest?
2. What is the future value of $10000 with an interest rate of 16 percent and one annual period of compounding?
With an annual interest rate of 16 percent and two semiannual periods of compounding?
With an annual interest rate of 16 percent and four quarterly periods of compounding?
3. What is the relationship between the present value factor and future value factor?
4. Compare the results of the present value of a $6000 ordinary annuity at 10 percent interest for 10 years with the present value of a $6000 annuity due at 10 percent interest for 11 years.
Explain the difference.
5. If a nurse deposits $1000 today in a bank account and the interests is compounded annually at 12 percent what will be the value of this investment:
Five years from now?
Ten years from now?
Fifteen years from now?
Twenty years from now?
6. Comment of the following statement. When a not-for-profit facility receives a contribution from a member of the community the cost of capital is inconsequential when deciding how to use this
contribution because it is in effect free money.
7. What are the primary drawbacks of the payback method as a capital budgeting technique?
8. Explain why pro forma income statements adjust for depreciation expense when developing projected cash flows for a project.
9. Will a decision that is based upon NPV ever change if it were based upon IRR instead? Why or why not?
Part 5: Debt Financing and Financial Investment Analysis
Loan Amortization
Land Hope Hospital has hired you to advise them on a loan they need to take out. Prepare a list of questions you will need them to answer in order to prepare a amortization schedule.
Capitol Investment
A capital investment is expected to achieve long-term benefits for the organization.
These benefits generally fall into three categories.
Identify and discuss these categories.
Is there one category that seems to be more important than the others?
Are they independent or interdependent?
Break-even Analysis
Sure Care Health Maintenance Organization is seeking a managed care contract with a local manufacturing plant. Sure Care estimates that the cost of providing preventative and curative care for the
300 employees and their families will be $36000 per month.
The manufacturing company offered Sure Care a premium bid of $200 per employee per month. If Sure Care accepts this bid and contracts with the manufacturing firm will Sure Care earn a profit or
loss for the year? How much?
Describe the steps you used to solve this question.
Issuing Debt and Bond Valuation
1. What avenues are available for for-profit and not-for-profit health care providers to increase their equity position?
2. What are the advantages and disadvantages to a taxpaying entity in issuing debt as opposed to equity?
3. Explain the difference between subordinate debentures and debentures.
4. Why would an investment banker syndicate a bond issue with other investment bankers?
5. If a $1000 zero coupon bond with a 20-year maturity has a market price of $311.80 what is its rate of return?
6. A tax-exempt bond was recently issued at an annual 8 percent coupon rate and matures 20 years from today. The par value of the bond is $1000.
7. If a required market rates are 8 percent what is the market price of the bond?
8. If required market rates fall to 5 percent what is the market price of the bond?
9. Charles City Hospital plans on issuing a tax-exempt bond at the bond is $1000.
10. If required market rates are 6 percent what is the value of the bond?
11. If required market rates fall to 12 percent what is the value of the bond?
12. At what required market rate (36 or 12 percent) does the above bond sell at a discount? At a premium?
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