Healthcare Financial Management: Budgeting and Financial Planning, Exams of Nursing

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Why is cost accounting so important in health care? - correct answer Though costs have such a minor role in deermining prices, cost accounting is very important in a healthcare organization. Because reimbursment is predetermined, managment must focus primarily on finding ways tomanage cosgts, so cost accougtning is critical. Cost information is uselful to a variety of key decisionmakers in a healthcare organization. Different concepts of cost are required for different purposes. Thefore it is imporant to understand the specific uniaue methodologies of cost measurement Incremental or marginal cost - correct answer Incremental or marginal costs are used when costing decisions are being made with the understanding that there is a difference in cost at two different activity or volume levels Contribution margin - correct answer The contribution margin is the difference between marginal revenue and marginal cost. The contribution margin equals the revenue received for one unit of service less the marginal expenses incurred for one unit of service. The contribution margin is the amount of revenues remaining after meeting marginal costs. Contribution margin goes toward supporting fixed costs;if it exceeds that it goes to profit Break even point - correct answer The level of sales volume of a certain product producing the exact amount of contribution margin needed to cover fixed costs Total fixed cost/contribution margin per unit=break even point Full absorption costing - correct answer Full absorption costing attempts to allocate all overhead costs to all activities supported by those costs. Overhead , or indirect costs, are allocated down to the revenue producing activities based on an objective methodology. Differential costing - correct answer Differential costing ignores the overhead costs and only looks at incremental costs that are directly related to the product Example - correct answer The decision to use full absorption costing or differential cost is made based on how the information will be used. For example, when management is assessing the profitability of all hospital programs to one another , then it may be appropriate to consider departmental costs on a full

absorption basis. This may be an effective way to identify marginally performing departments for further action. If however the analysis was conducted to price a contract that would bring incremental volume, but would required no additional investment of equipment or indirect labor, then it would be appropriate to consider only marginal direct (differential) costs Direct cost - correct answer Direct costs may be fixed or variable but they are clearly and directly associated with the activity that is being costed. Direct costs include for example direct salaries and supplies Indirect costs - correct answer Indirect costs may also be fixed or variable but they are not clearly nor directly associated with the activity being costed. Overhead is a common term for indirect costs. Indirect costs are assigned to a service using some acceptable allocation method. An example would include administration provided in a hospital setting. Activity based costing - correct answer Activity based costing is a method of determining product costs using cost driver as or activity measures, that cause indirect costs to be incurred. Ideal cost drivers are activities that pertain to each procedure in varying amounts. ABC is generally considered a more accurate costing method than the proportionate allocation method. It is how're often more expense to determine due to the necessary data collection Example of abc - correct answer An example of a b c would be using the level of a specific equipment use to determine the allocation of depreciation and repair expense. Service line costing - correct answer Health care organizations have developed product lines based on major diagnostic categories for example diseases of the digestive system or obstetric procedures. The advantage of analyzing results by diagnostic category is that it develops an estimate of total resources consumed, including resources consumed in shared departments.

Example of service line costing - correct answer For example, the resources consumed by a cardiac patient in an imaging department are considerably more than the resources consumed by a patient with pneumonia Profitability analysis of service line costing-several objectives - correct answer 1)shift financial analysis toward the major lines 2)determine the advantages or disadvantages of being in that product line 3)emphasize or de-emphasize certain services 4)determine data for use in benchmarking among clinical specialties Important ***** product line costing - correct answer Product line costing can also be useful in assessing the profitability of a proposed managed care contract and in developing carve out rates for specific types of cases (for example open heart surgeries and bone marrow transplants) Identify the 3 main types of standards - correct answer Learning objective Responsibility accounting - correct answer The assignment or allocation of cost to the individual manager who is primarily responsible for making decisions a bout those costs. Once the primary responsibility for incurring a specific cost has been established, various management reports such as departmental expense reports can be developed to assess a managers effectiveness. Intro to standard costing system 2 principal uses for cost accounting: assist with price negotiations and identify opportunities to enhance financial performance. - correct answer Cost accounting is used for management decision making. Th better the cost info the better the decision making Standard costing systems - correct answer 1)predetermined or synthetic standard-arrived at by a group or association of organizations with similar characteristics (for example a published relative value scale) 2)negotiated or historical standard-based on historical data of the specific institution for which the budget is intended

3)customized or engineered standard-based on detailed time or activity studies within a specific department of a specific institution Adv and disadvantage of predetermined or synthetic standard - correct answer Advantages Minimal development Ease of development and implementation Not based on specific items and not specific to an individual facility Disadvantages Not customized thus less precise Not as well accepted May not be applicable directly to an individual with in a specific facility Advantages and disadvantages of negotiated or historical standard - correct answer Advantages Easy to develope Less expensive Less disruptive than a customized standard Department involvement and understanding may be better than with a predetermined standard, but less than with a customized standard Disadvantages Less precise than customized standards Difficult to obtain agreement for change predictions based on historical results Advantages and disadvantages customized or engineered standard - correct answer Advantages More precise More supportable by individual data specific to the entity Offer the opportunity for departmental improvement becuase they are based on actual activity or procedure at hand Disadvantages

Very expensive Time consuming to develope Difficult to understand Obj: to recognize the four types of individual cost behaviors - correct answer Variable cost - correct answer -responds, in total more or less in direct proportion to changes in volume -an example is the relationship between supply costs and outpatient or patient days. For out hgealthcare organizations, majority of supply costs will vary directly with volume Fixed cost pattern - correct answer Costs that in the short run do not change with changes in volume '-examples would be depreciation, long term lease expense, or amortization of incurred financing costs Semi variable cost patters - correct answer Costs that vary in direct relation to volume after a minimal level of activity has been reached. -an example of semi variable cost behavior in healthcare organizations is the telephone expense, where a monthly access and service charge is paid initially, no matter wha the volume is , and then each time a long distance or local phone call is made an additional charade is assessed. This therefore exhibits the behavior of fixed costs initially and variable cot thereafter. Semi fixed or stepped variable - correct answer -costs change with volume, but not in direct proportion to the volume rather they follow a stair step pattern -an example of this type of change in a hospital setting would a salary cost in an acute staffing area. If you have a 20 bed acute area with an occupancy of 5 patients, you would not need any ore staffing than you would for one patient. However when the 6th patient is admitted to the service area, you would have to add an additional fee along with the previous staff could provide services for as many as 10 occupants at that service level. Then again once you get to the 11th occupant you would have to add another fate and so forth Objective: identify the 3 principal types of expense variances - correct answer

Price variance - correct answer Price variance determines the financial impact of the difference between the actual price paid for a certain supply and the budgeted price for the supply Volume variance - correct answer A volume variance determines the difference between budgeted and actual units of service provided Efficiency variance - correct answer Determines the financial impact of a difference between the budgeted labor hours per unit of service and the actual labor used per unit of serviced Reimbursement and managed care obj - correct answer Part 1:managead care payment methodologies (recognize the primary payment methods used in managed care) Part2:modeling of managed care products (identify why healthcare providers develop different modeling tools Part 3:partial and full risk arrangements (recognize the general categories of provider excess loss insurance) Third party payors - correct answer 1)governmental payers 2)medicare -federal government program -provides coverage for elderly and permanently disabled individuals 3)medicaid -state and federal government program -provides coverage for economically disadvantaged individuals

4. commercial insurance -provides coverage for groups and individuals 5)preferred provider organizations -provides coverage for groups and individuals -seeks to obtain favorable pricing by limiting providers 6)health maintenance organizations -provides coverage for group and individuals

-accepts responsibility for providing all services Fee for service - correct answer Fee for service is billing by health providers for each service performed in specific amounts. Amounts may be a percentage of list charges. There is a set amount for each service per the contract. Per diem rate - correct answer The per diem rate covers all inpatient services utilized while the beneficiary is in the hospital. It is common to develop more than one per diem rate, depending on the type of service provided. For example, it is common to have a different rate for medical and surgical patients. Or it is possible to negotiate one rate for the first two days of admission and then a lower rate for the remainder of the stay. This recognizes that the majority of resources are consumed in the first 48 hours of a hospital stay Case rate - correct answer Medicare reimbursement introduced the concept of a case rate where preadmission testing and inpatient services are reimbursed based on the diagnostic grouping into which the case falls. There is a fixed dollar amount of reimbursement associated with each diagnosis related group regardless of resources consumed Many commerical carrier have adopted this methodology, negotiating flat amounts for certain types of cases. More recently,payers have been negotiating global case rates for certain cases (for example open heart surgeries) that include professional fees and home care services as well as preadmission and inpatient services Types of healthcare providers - correct answer Hospitals Long term care facilities Durable medical equipment suppliers Home health agencies Hospice agencies LO Identify why healthcare providers develop different modeling tools - correct answer It is important to consider costs of services covered under the contract that must be purchased by the provider.

In analyzing the financial impact of a contract, the provider should consider whether it will result in additional business or will convert existing business to a new reimbursement methodology Quant antic. Revenues and costs Fee for service contracts - correct answer The proposed discount would be compared to the contribution margin for the related services at the expected utilization levels Contract proposes a fee schedule- the analysis would require cost estimates for each schedule rate. It is Ike's that some of the procedures will have a positive contribution margin and others will have a negative contribution margin. In this case, it will be necessary to consider the projected volumes for each procedure to determine the aggregate revenue and cost in order to assess the potential financial impact of the contract If contract proposes a case rate the provider should develop a corresponding case cost, using historical treatment protocols for similar cases Cost per visit X annual utilization enrolled / 12 months - correct answer 308X1100=338, 338,800/1000(annual enrollees per ex)=338. 338.8/12=28. All of the services get added together ER 1244 annual util. Cost per visit=240 co pay= 240-50= 190x1244=27, 27360/1000=27. 27.36/12=2.

Which of the following options is a managed care product that is easy to evaluate: A)capitation B)fee schedule C)case rate D) fee for services - correct answer D this option otherwise known as a discount charge is generally the easiest reimbursement method to model. The analyst need only compare the pros posed discount rate to the contribution margin for the related services at the expected utilization levels. If the contract proposes a fee schedule the analysis would require estimates for each scheduled rate Healthcare providers should develop different modeling tools depending on A)the reimbursement method proposed in the contract B)whether it will result in additional business C)cost estimates for each scheduled rate D)what the cost structure would be - correct answer A In any proposed contract, the provider should quantify the anticipated revenues as well as the cost of providing the proposed services at the projected utilization levels Learning objectives Recognize the general categories of provider excess loss insurance - correct answer 1)risk sharing arrangements Risk sharing arrangements - correct answer Per diem contract-the hospital is at risk for shorter, more resource intensive inpatient stays. Where case rates have been negotiated , the hospital is at risk for higher acuity admissions that are more costly. Payers are creating contracts that provide incentives for the physicians and institutions providers to align practice patterns to achieve high quality cost effective care. Most common is risk sharing-a risk pool that is shared by the providers based on predetermined performance goals

Managed care arrangements generally result in providers A)receiving, on average, a higher level of reimbursement B)assuming greater financial risk for the level of services provided C)relaxing their management for the level of service provided D) being fairly and adequately reimbursed for the level of services provided - correct answer B With the exception of fee for service arrangements, providers are at risk for the level of services beyond that used to establish the reimbursement rates Quality and risk based payment - correct answer These plans develop medical benefit budgets for each of the primary benefit catergories. The payer withholds a position of the provider payments in a risk pool fund and rewards providers for the efficiency by returning the withheld amounts as well as a share in budgetary surpluses, based on individual performace Risk sharing arrangements Quality indicators-these arrangements treat providers more equitably by allowsing them to share in both utilization risk and reward. It also hold providers accountable for overuse of resources by transferring utilization risk up to the risk pool amount to the providers - correct answer Risk sharing arrangement Identifying reimbursement at risk - correct answer Any reimbursement that is at risk must be identified. The extent to which risk based reimbursement will ultimately be achieved is dependent on the performance of every other provider participating in the plan and the extent to which the participant incentive have been properly aligned Provider excess loss insurance The greater the risk assumed by the provider in accepting a managed care contract the more important it is to consider minimizing the exposure by transferring, or re insuring the risk - correct answer The General categories are: Per person Aggregate Carve out Provider excess loss insurance'

Per person excess loss insurance - correct answer Per person excess loss insurance, also known as specific excess loss insurance is the most common and familiar coverage available. Per person excess loss insurance reimburses the provider once costs for an individual patient exceed a specified threshold or deductible. This coverage is designed to protect the provider agonist large and unforeseen claims for the population defined in the policy. These policies generall included max limits one for each indiv patient and an overall policy limit. These limits should match the exposure that is assumed under the managed care contract Provider excess loss insurance Aggregate excess as loss insurance - correct answer Covers the entire risk pool, rather than each individual with in the risk pool. It provides protection against losses caused by utilization fluctuations and is particularly useful for providers switch little catastrophic coverage. Provider excess loss insurance Care even out excess loss insurance - correct answer Provides individualized coverage for providers groups with specific needs. For example, a group of cardiac surgeons might negotiate for all open heart surgeries for a managed care organization Financial planning and budgeting - correct answer Learning Objectives: 1)recognize the purpose of a strategic plan 2)identify the main types of control budgets 3)identify assumptions developed during the budgeting process 4)recognize statistical factors typically used in operating budgets 5)identify the primary purpose of measuring productivity 6)identify the different types of budgets used in healthcare 7)identify the four variances that must be explained and clarified by cause 8)identify common evaluation techniques used for all capital requests 9)identify the users of ration analysis 10)identify the categories of ratios used in healthcare Purpose of a budget A budget is a formal plan for future operations expressed quantitatively - correct answer 1)a budget is a tool for monitoring performance against that plan

2)a budget incorporates the strategic and operating plans for the organization, both in terms of the revenues and expenses, as well as the statistical volumes and resources associated with the plan 3)a budget provides a framework for setting priorities securing and allocating resources efficiently and controlling costs Budgeting process and strategic plans - correct answer As part of the organizations strategic plan management should not only authorize new programs and initiatives but also validate existing programs. Programs failing to meet performance standards might be eliminated as part of this process Organizations should have a clear plan as to why they are in business and how's they can stay in business in the future. What is such a plan called: A)organizational chart B)mission C)strategic plan D)future plan - correct answer C This option is also used to identify what capital resources are necessary now and in the future and how to plan for the future 3 types of controls budgets: - correct answer Operating budgets Capital budget Cash budget Operating budget - correct answer Prepared on a departmental or service basis placed responsibility for meeting budget targets on departmental or service managers where greater direct control of resources reside. It is responsible primarily for controlling expenses and to a lesser extent for meeting revenue targets Operating budget components - correct answer Statistic budget-a forecast of the relevant activity level for each department. It defines the volume of business for the year and is expressed in terms such as patient days admissions visits, covered members or lives Revenue budget-a set of calculations that determines the gross amounts to be generated by charging healthcare services. Units of service multiplied by the appropriate charge rates result in revenue

Expense budget-accounts for the quantities and types of resources to be used to achieve the projected statistical volumes. Capital budget-to determine the amount of resources needed to provide for major non-operating expenses. Building needs, technology, and equipment and other items that are not part of operations - correct answer Maintenance capital-required to maintain a program or facilities at an existing level Strategic capital-involves the expansion of existing programs, the initiation of new programs and services or both Cash budget-the product of the operating and capital budgets, predicts the cash flow, cash availability and the income generated from operating and other sources of cash - correct answer Which option is not a type of control budget A)operating B)capital C)cash D)variances - correct answer D variances Variances from budget highlight deviations requiring investigation,explanation, and impact evaluation. Discovering variances allows management to manage by exception and focus only on those activities producing operating results that vary from plan to plan Which control budget places the responsibility for meeting budget targets on departmental or services managers? A)operating budget' B)capital budget C)cash budget D)control budget - correct answer A Operating budget

Variance from this budget type highlight deviations requiring investigation explanation and impact evaluations. This allows management to manage by exception and focus only on those activities producing operating results that vary from plan to plan. Budget process: develops assumptions for the following: - correct answer 1)admissions or patient visits 2)change in admissions or visits 3)average length of stay 4)changes in length of stay 5)total expense per visit or admissions 6)inflationary impact on total expense per admission or visit 7)full time equivalent staffing per admissions 8)impact of productivity initiatives on fte per admission or visit 9)avaerage labor cost per fte 10)impact of average wage increase on average labor cost per fte

10. net REVENUE PER ADMISSION OR PATIENTvisit 11)change in net revenue per admission or paying visit Which statistical factor is typically used by healthcare organizations in their operating budgets A)historical statistics B)technological developments C)labor contracts and union activities D)cash flow budgets - correct answer A historical statistics Are statistical factors used in developing an operating budget. Other statistical factors used in the developing process included process improvement process included process improvements marketing efforts and demographic trends Budget methodologies - correct answer Zero based budgeting-builds on premise that not department or program exists forever. It builds projections for volumes, revenues, labor costs, supply costs, and other operating expenses. It is based on the most current pieces of information available with respect to each revenue and expense category

Historical budget-assumes current year results with best predict what will happen in the future, unless modified by a specific projection. Current volumes and statistics are adjusted only by the overall assumptions unless there is a specific reason for change. Comb of zero based and historical budgeting-it is possible to develop a combination approach. The selected approach can be segregated based on departments or based on expense categories Measuring productivity- Identify areas where corrective action may be appropriate R - correct answer Examples: Nursing hours per patient day Productive hours as a percent of total paid hours Turnover rates Monitoring productivity - correct answer Differs from the responsibility reporting in 2 ways:

1. it is close to real time with reports going out immediately following the payroll reporting cycle 2)it differentiates between fixed and variable costs, and centers and modifies labor targets based on actual volumes What is the primary purpose of measuring productivity: A) for management to determine if resources are being used efficiently B)for management to implement a separate labor productivity monitoring process C)for management to identify areas where corrective action may be appropriate D)for management to incorporate strategic and operating plans for an organization - correct answer A To best accomplish this an objective methodology to evaluate and measure productivity should be used those results should then be compared to actual productivity with a predetermined standard or benchmark Fixed budgets-the budget is prepared under the assumption of a single activity or volume level, the most likely level given all available information at the time the budget is prepared - correct answer

Flexible budgets - correct answer Maximize benefits Develop a series of fixed budgets prepared under various assumptions -define primary column statistics for each department and develop cost standards for each cost component that are then used to service standard cost for each primary volume statistic Standard X actual volumes = flexible budgets Which budget type is prepared under the assumption of a single activity or volume level: A)flexible budgeted B)operating budget C)fixed budget D)cash budget - correct answer C A fixed budget is a budget that is prepared under the assumption f a single activity or volume level, the most likely level given all available information at the time the budget is prepared. Which budget type is prepared under various assumptions that would include the range of volumes that could reasonably be expected: A)flexible budgets B)fixed budgets C)cash budget D)operating budget - correct answer To maximize the benefits from budgeting as a control tool,many organizations have adopted flexible budgeting. With flex budget department managers can re-evaluate each cost component given the various volume assumptions and their own knowledge of cost behaviors for their departments Management reporting-effective communication of actual to budget performance to all level of management so results are understood, corrective actions can be identified if necessary and on going decision making is enhanced - correct answer Responsibility reports-a key element in management reporting and include information on statistics, and revenues and expenses for each cost center or division.

Variances- - correct answer Volume-determines the financial impact of a difference between the actual volume and the budget volume Rate variances-which would result from variance between the budgeted rate and actual rate charged for the procedure Price variances-result from a variance in the price of a supply compared to that assumed in the budget. Efficiency variances-a variance in the amount of labor or supplies used for each procedure. Additional data- for department heads to effectively respond to responsibility reporting and provide variance explanations - correct answer -org level balance sheet -state of revenue and expenses -various supporting schedules (department/service line revenue and expenses, key volume statistics, financial ratios, quality factors and trends -capital expenditures as compared with budget for the department and entire organization Learning objective:recognize the different types of long term debt - correct answer 1) debt financing

2. equity financing 3)joint ventures 4)capital lease financing 4 major sources of long term debt available - correct answer 1) tax exempt bonds 2)federal housing admin insured mortgages 3)public taxable bonds 4)conventional mortgage financing Definitions with terms - correct answer Principal-the amount of the loan Interest-a rental fee for use of the principal

Debt-describes a variety of obligations that require the borrower to repay borrowed money over a period of time with interest Debt service-the required payments of principal and interest Annual debt service-the required payment of principal and interest for any given year Total debt service-the sum of all debt service payments under the obligation Private placement - correct answer Lender is local Adv-since there is only one lender. The costs of arranging the issue are lower. Also, the borrower and the lender can define what is mutually important Disadvantage-lender could require a particular covenant to be more restrictive than a public offering would require. Which of the following types of debt depend on the revenue stream generated by the issuer to provide for repayments? A)general obligation bond B) revenue bonds C)tax example bonds D)taxable debt bonds - correct answer B Learning obj-define the term covenant Recognize the reasons why a hospital would want to undertake debt restructuring - correct answer Healthcare bond issues place legal obligations on the borrower that are intended to protect the lender against default by the borrower. Coventants may include a definition of the collateral performance requirements liquidity and restrictions on figure indebtedness Debt restructuring-4 reasons - correct answer Take advantage of lower interest rates Change collateral restrictions that is restrictive covenants in an existing agreement Allow acquisition of other assets, this means packaging existing debt with new money debts, in order to be abl to acquire new assets new buildings or new equipment. Better fit debt service requirements to current operations

Which option is not a reason why a hospital would want to undertake a debt restructuring by either retiring or re acquiring existing debt: A)to take advantage of lower interest rate B)to change collateral restrictions C)to allow acquisitions of other assets D)to better fit debt service requirements to current government regulations - correct answer D All of the following are true of a bond transaction working except: A) it is formed at the time the borrower decides to begin the process of issue in deb B)the borrowers management typically works with the organization financial advisor or investment banker to develop a preliminary structure for the debt C)preliminary discussion s with bond counsel may be held to determine any tax consequences D)generally the issuer , the borrower and the underwriter are only represented by legal counsel at the end of the process - correct answer D Legal counsel is and must be involved through out the proces not just at the end. What are covenants: A)legal obligations on the borrower that are intended to protect the lender against default by the borrower B) the date when the issuer may elect to redeem bonds that are not yet mature C)the process of implementing a healthcare bond transaction D)an occurrence when an organization fails to meet one of the terms in its financing agreement - correct answer A LO: identify the components needed to use the discounted cash flow method - correct answer When the investment is significant the actual value of the assets should be established using one of three valuation methods: Discounted cash flow method Replacement cost method Market comparison method - correct answer

Use the discount method to determine how much money must be put in the bank today to have $ in three years The interest rate is 8% and the discount factor is. A) B) C) D)926 - correct answer B The 1000 in cash in three years is discounted back by the factor 794 that is 1000x.794= A machine costs us 15,000 we will have a net income of 6000 in year 1, 6000 year 2, 2500 year 3, 2500 year 4. The salvage value of the equipment is 2000. Assuming we can borrow money at 15% and the discount factors are .870 for year 1, .756 for year 2, .658 for year 3, and .572 for year 4 should we buy the equipments A) yes B) no - correct answer B 6000x.870= 6000x.756= 2500x.658= 2500x.572= 2000x.572= Total 13, In order to discount cash flow you need to know: A)payment flow and interest rate B)the actual value of the assets C)several investment opportunities available on a common basis D)the current dollar value of comparable assets - correct answer A To discount cash flow, you need to know both payment flow and interest rate to adjust for time value of funds. The interest rate used should reflect the cost of money and risk associated with the project

LOs: identify the three valuation methods used to quantify the value of an asset to be acquired Recog. The four quantifiable factors that must be included in an evaluated capital investment proposal - correct answer Discounted cash flow Replacement cost method Market comparison Replacement cost - correct answer Determine the replacement cost for a building or a piece of equipment or the replacement cost for starting up an operations Market comparison - correct answer Compare the recent sales prices or income characteristics of similar properties within a specific geographic market to the facility or property in questions Evaluating capital investments - correct answer 1) cash outflow-the amount of cash required to plan and implement an investments 2)cash inflow-incremental net revenues associated with the capital investment decision including any cost savings, and the impact of cost based reimbursement and or taxation. 3)economic life-estimated time period that the investment will provide positive returns 4)opportunity cost of funds-the benefits that would be received from the next best alternative use of the investments funds. Los:'recognize the two types of equity financing Recognize the benefits and risks of joint venture and business relationships - correct answer Type of equity financing Internal equity financing External equity financing - correct answer Internal,-least expensive; the operating and no operating income and any cash reserves of the institution are used to financing the capital investments External-more expensed source of capital funds. It is traditionally accomplished through the sale of stock

By structuring a joint venture so that the majority of the tax benefits accrue to the for profit group the following benefits may be gained - correct answer A)attracting physician and for profit groups as investors B) allowing a nonprofit organization to enter into a lint venture deal with minimal up front capital investments due to the tax benefits that flow to the for profit groups C)allowing the parties to combine their financial resources and may give them access to additional sources of capital D)allowing entities to spread the risks associated with a deal. E)allow an entity to remain competitive in its marketplace when it cant do so by itself Joint venture includes the following associated risks - correct answer )if the deal loses money all parties involved lose money B)what could have strengthen the tie with a physician may have the opposite effect C)rewards will be shared if the joint venture becomes profitable ' D)tax exempt status may be endangered through incurement or private benefit problems E)medicare.medicaid fraud and abuse may be alleged LOs: Recognize the advantages and disadvantages of leasing Differentiate a capital lease from an operating lease - correct answer Types of leases - correct answer Capital lease- all of the benefits and risks of ownership have been effectively transferred to the lessee, except the lessee doeasn't get title to the asset or any value at the end of the lease. Capital lease must have 4 critieria- 1)the lease contains a bargain purchase option 2)lease contains a transfer of ownership to the lessee by end of lease term 3)lease term is equal to 75% or more of the estimated economic life of the lease property and the banning of these lease term does not fall within the last 25% The PV. Of the lease payments is greater than 90% of the fair market values

Operating lease - correct answer One in which the hospital is liable for the leasing cost for that term of the lease. Equipment and lease renewal options are determined by the failure market value of the equipment. The hospital does not have any ownership right during or after the leasing period Credit rating criteria LO: identify the areas and factors that rating agencies use to determine the credit rating for an organization - correct answer Credit rating factors - correct answer A) provisions or structure of the financing-the legal provisions or the structure of the financing that is. The security if any behind the bonds and the bond holders. agencies will look for a specified set of legally enforceable requirements B)competitive environment and market positions-typically acute care, major teaching, and regional research institutions would be looked at more favorably than specialty or primary care community institutions. The concern here is primarily the institutions C)medical staff characteristics D) management capability E) financial factors Which of the following is not a method used to quantify the value of assets? A)discount cash flow method B)replacement cost method C)debt restructuring method D)market comparison method - correct answer C LO-Cash forecasting

1. identify one primary purpose of a cash budget 2)identifythree methods used to prepare a cash budget - correct answer Purpose of a cash budget - correct answer 1)identify cash requirements and cash sources for a certain period of time
2. control the flow of cash funds

Other specific uses of a cash budget - correct answer 1)identify peaks or seasonal fluctuations in business activity 2)indicate the time and extent funds are needed to meet maturing obligations interest payments etc 3)assist in planning for the funding of capital acquisitions 4)determine the extent and duration of funds reaffirmed from outside sources and permit the securing of more advantageous loans

5. assist in securing. Credit 6)funds available for investments 7)plan the reduction of bonded indebtedness 8)coordinate financial needs of subsidiaries and divisions Types of cash budgets-prepared each month of the budget period. But where cash balances are low or profit margins are thin the budget may be prepared on a weekly or daily basis. - correct answer Short term-cash budgets covers a period of one year or less, cash budget is particularly useful to plannn g daily operations shorter temper forecasts are less tentative Long term-cash forecast or budget covers a period beyond a year, useful in formulating overall financial policies, forecast are more tentative and contain fewer details. Steps in preparation of a cash budget: - correct answer 1)determine available cash balance at the end of the previous month 2)prepare a list of all expected sources of cash receipts for the period to be covered by the forecast 3)estimate the amounts to be received from each source within each month, week, or day of the period to be covered 4)prepare a list of all expected requirements for cash expenditure for the period to be covered 5)estimate the amount to be expended for each requirement with in each month, week, or day of the period to be covered 6)organize the estimated receipts and reqauirements into a summary showing the following: 'Prior period eanding cash balance, plus total estimated receipts each month,less total estimated disbursement each month equals available cash balances at the close of the period. 7)revise the forecast if events indicate that the original estimates are in error

Three methods of. preparing a cash budget - correct answer 1)cash receipts and disbursements method-used more frequently-a projection of incoming and outgoing cash. This method contains a detailed listing of the sources of cash receipts and disburse. This method is flexible and readily adaptable to both short run and long run projections. 2)adjusted net income method-estimated statement of income and expense provides the starting point for this method. expected net income is first adjust for all non cash transactions to arrive at estimated income or loss on a cash basis ; adjusted for cash transactions that do not affect the income calculation 3)working capital differential method0excess of current assets over current liab.; estimated working capital at the end of each month is determined from expected service and revenue volume. What is one primary purpose of a cash budget 1)to identify cash requirements and cash sources for a certain period of time 2)to evaluate investment alternatives 3)to coordinate the financial needs of subsidiaries and divisions 4)to determine the available cash balance at the end of the previous month - correct answer 1 Adequate liquidity to meet cash needs must be available at all times Learning objectives

1. identify the components incorporated in a cash budget 2)identify the commerical banking services used by many healthcare organizations - correct answer Components of a cash budgeted - correct answer 1)ability of the organization to manage the overall revenue cycle, which determines how quickly the organization receives cash rom 3rd party payers 2)the healthcare organizations projection of costs 3)variability in activists that impact both revenue and expenses 4)regularly recurring or periodic expenses such as utilities and taxes 5)timing of capital purchases 2 components of cash management - correct answer 1) internal cash management