Finance

Part 1: Statement of Operations and Fin" rel="nofollow">inancial Statements Statement of Operations and Fin" rel="nofollow">inancial Statements 1. List several efforts that have been enacted by payors to control costs. Explain" rel="nofollow">in the ramifications of allowin" rel="nofollow">ing/disallowin" rel="nofollow">ing an in" rel="nofollow">individual to be able to sue his or her HMO. 2. What are each of the fin" rel="nofollow">inancial statements commonly called in" rel="nofollow">in for-profit health care organizations and in" rel="nofollow">in not for-profit care organizations? The followin" rel="nofollow">ing 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" rel="nofollow">in sections of the statement of operations? 2. What are revenues, gain" rel="nofollow">ins, and other support? 3. What are expenses and losses? 4. Funds released from restricted net assets to unrestricted net assets are presented in" rel="nofollow">in what section of the statement of revenue, expenses and other activities? The followin" rel="nofollow">ing questions relate to the statement of changes in" rel="nofollow">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" rel="nofollow">in sections of this statement? 4. Discuss the difference between permanently restricted and temporarily restricted net assets. The followin" rel="nofollow">ing questions relate to the statement of cash flows of a not-profit health care organization. 1. What are its main" rel="nofollow">in sections? 2. What is the purpose of this statement? 3. Where in" rel="nofollow">in the fin" rel="nofollow">inancial statements would there be important explanatory in" rel="nofollow">information? 4. In what fin" rel="nofollow">inancial statement would one identify the purchase of long-term in" rel="nofollow">investments? 5. How does the accrual basis of accountin" rel="nofollow">ing differ from the cash basis of accountin" rel="nofollow">ing? Part 2: Accrual vs. Cash Basis Accountin" rel="nofollow">ing & Balance Sheet Accrual vs. Cash Base Accountin" rel="nofollow">ing 1. Explain" rel="nofollow">in the difference between the accrual basis of accountin" rel="nofollow">ing and the cash basis of accountin" rel="nofollow">ing. What are the major reasons for usin" rel="nofollow">ing accrual accountin" rel="nofollow">ing? 2. What are the purpose of a journal and a ledger? Give an example of a contra-asset, and explain" rel="nofollow">in how it is recorded on the ledger as a transaction. 3. Explain" rel="nofollow">in what a “prepaid expense” is and how it is recorded on the ledger as a transaction. 4. What are the major differences in" rel="nofollow">in recordin" rel="nofollow">ing 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 Clin" rel="nofollow">inic under the accrual basis of accountin" rel="nofollow">ing 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 clin" rel="nofollow">inic received a $3,000,000 of unrestricted cash contribution from the community. (this transaction in" rel="nofollow">increases the unrestricted net assets account.) • The clin" rel="nofollow">inic purchased $2,000,000 of equipment. The clin" rel="nofollow">inic paid cash for the equipment. • The clin" rel="nofollow">inic borrowed $1,000,000 from the bank a long-term basis, • The clin" rel="nofollow">inic purchased $1,500,000 of supplies on credit. • The clin" rel="nofollow">inic provided $5,500,000 services on credit. • In the provision of these services, the clin" rel="nofollow">inic used $1,000,000 of supplies. • The clin" rel="nofollow">inic received $500,000 in" rel="nofollow">in advance to care for capacitated patients. • The clin" rel="nofollow">inic in" rel="nofollow">incurred $2,000,000 in" rel="nofollow">in labor expenses and paid cash for them. • The clin" rel="nofollow">inic in" rel="nofollow">incurred $1,500,000 in" rel="nofollow">in general expenses and paid cash for them. • The clin" rel="nofollow">inic received $4,500,000 form patients and their third parties in" rel="nofollow">in payment of outstandin" rel="nofollow">ing accounts. • The clin" rel="nofollow">inic met $300,000 of its obligation to capacitated patients in" rel="nofollow">in Transaction g. • The clin" rel="nofollow">inic made a $100,000 cash payment on the long-term loan. • The clin" rel="nofollow">inic also made a cash in" rel="nofollow">interest payment of $50,000. • A donor made a temporarily restricted donation of $100,000 to be used for operations. • The clin" rel="nofollow">inic recognized $200,000 in" rel="nofollow">in depreciation for the year. • The clin" rel="nofollow">inic recognized $500,000 of patient accounts would not be received. 6. How do capital structure rations and liquidity rations differ in" rel="nofollow">in providin" rel="nofollow">ing in" rel="nofollow">insight in" rel="nofollow">into an organization’s ability to pay debt obligations? 7. Identify and explain" rel="nofollow">in two situations where an organization might have in" rel="nofollow">increasin" rel="nofollow">ing activity rations but declin" rel="nofollow">inin" rel="nofollow">ing profitability. Part 3: The Workin" rel="nofollow">ing Capital Cycle and the Cost of Credit Maximizin" rel="nofollow">ing Revenue and Expenditures Explain" rel="nofollow">in how the four kin" rel="nofollow">inds of float (billin" rel="nofollow">ing, collections, transit and disbursement) can be used to maximize the efficiency of in" rel="nofollow">incomin" rel="nofollow">ing revenues and outgoin" rel="nofollow">ing expenditures? What kin" rel="nofollow">inds of policies can be in" rel="nofollow">initiated to facilitate maximum efficiency and why? The Workin" rel="nofollow">ing Capital Cycle and the Cost of Credit 1. In terms of cash flow, what are the stages of the workin" rel="nofollow">ing capital cycle? 2. Describe the two components of a workin" rel="nofollow">ing capital management strategy. 3. What are the two types of unsecured bank loans? Describe each. 4. In the hospital’s billin" rel="nofollow">ing process, why is medical records a critical department? 5. Identify the alternatives for in" rel="nofollow">investin" rel="nofollow">ing 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 defin" rel="nofollow">ine two methods to fin" rel="nofollow">inance accounts receivable. 8. Compute the annual approximate in" rel="nofollow">interest cost of not takin" rel="nofollow">ing a discount usin" rel="nofollow">ing the followin" rel="nofollow">ing 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 lin" rel="nofollow">ine of credit with First Union National Bank. The terms of the lin" rel="nofollow">ine of credit called for a $200,000 maximum loan with an in" rel="nofollow">interest of 11 percent. Then compensatin" rel="nofollow">ing balance requirement is 15 percent of the total lin" rel="nofollow">ine of credit (with no additional fees charged). 10. What is the effective in" rel="nofollow">interest rate for City Hospital if 50 percent of the total amount were used durin" rel="nofollow">ing 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 $1,000? Part 4: Rate of Return & Net Present Value A. When usin" rel="nofollow">ing the IRR approaches, when can the in" rel="nofollow">internal rate of return be determin" rel="nofollow">ined simply by dividin" rel="nofollow">ing the in" rel="nofollow">initial outlay by the cash flows? Will a decision that is based on NPV ever change if it were based on IRR in" rel="nofollow">instead? Why or why not? Certain" rel="nofollow">inty, Inflation & Opportunity Cost B. Is it better to receive money today or money in" rel="nofollow">in the future? In your answer be sure to in" rel="nofollow">include the prin" rel="nofollow">inciples or certain" rel="nofollow">inty, in" rel="nofollow">inflation, and opportunity cost. Investment Payback Calculation 1. What is the difference between simple in" rel="nofollow">interest and compound in" rel="nofollow">interest? 2. What is the future value of $10,000 with an in" rel="nofollow">interest rate of 16 percent and one annual period of compoundin" rel="nofollow">ing? • With an annual in" rel="nofollow">interest rate of 16 percent and two semiannual periods of compoundin" rel="nofollow">ing? • With an annual in" rel="nofollow">interest rate of 16 percent and four quarterly periods of compoundin" rel="nofollow">ing? 3. What is the relationship between the present value factor and future value factor? 4. Compare the results of the present value of a $6,000 ordin" rel="nofollow">inary annuity at 10 percent in" rel="nofollow">interest for 10 years with the present value of a $6,000 annuity due at 10 percent in" rel="nofollow">interest for 11 years. Explain" rel="nofollow">in the difference. 5. If a nurse deposits $1,000 today in" rel="nofollow">in a bank account and the in" rel="nofollow">interests is compounded annually at 12 percent, what will be the value of this in" rel="nofollow">investment: • Five years from now? • Ten years from now? • Fifteen years from now? • Twenty years from now? 6. Comment of the followin" rel="nofollow">ing statement. “When a not-for-profit facility receives a contribution from a member of the community, the cost of capital is in" rel="nofollow">inconsequential when decidin" rel="nofollow">ing how to use this contribution, because it is, in" rel="nofollow">in effect, free money.” 7. What are the primary drawbacks of the payback method as a capital budgetin" rel="nofollow">ing technique? 8. Explain" rel="nofollow">in why pro forma in" rel="nofollow">income statements adjust for depreciation expense when developin" rel="nofollow">ing projected cash flows for a project. 9. Will a decision that is based upon NPV ever change if it were based upon IRR in" rel="nofollow">instead? Why or why not? Part 5: Debt Fin" rel="nofollow">inancin" rel="nofollow">ing and Fin" rel="nofollow">inancial 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" rel="nofollow">in order to prepare a amortization schedule. Capitol Investment A capital in" rel="nofollow">investment is expected to achieve long-term benefits for the organization. These benefits generally fall in" rel="nofollow">into three categories. Identify and discuss these categories. Is there one category that seems to be more important than the others? Are they in" rel="nofollow">independent or in" rel="nofollow">interdependent? Break-even Analysis Sure Care Health Main" rel="nofollow">intenance Organization is seekin" rel="nofollow">ing a managed care contract with a local manufacturin" rel="nofollow">ing plant. Sure Care estimates that the cost of providin" rel="nofollow">ing preventative and curative care for the 300 employees and their families will be $36,000 per month. The manufacturin" rel="nofollow">ing company offered Sure Care a premium bid of $200 per employee per month. If Sure Care accepts this bid and contracts with the manufacturin" rel="nofollow">ing firm, will Sure Care earn a profit or loss for the year? How much? Describe the steps you used to solve this question. Issuin" rel="nofollow">ing Debt and Bond Valuation 1. What avenues are available for for-profit and not-for-profit health care providers to in" rel="nofollow">increase their equity position? 2. What are the advantages and disadvantages to a taxpayin" rel="nofollow">ing entity in" rel="nofollow">in issuin" rel="nofollow">ing debt as opposed to equity? 3. Explain" rel="nofollow">in the difference between subordin" rel="nofollow">inate debentures and debentures. 4. Why would an in" rel="nofollow">investment banker syndicate a bond issue with other in" rel="nofollow">investment bankers? 5. If a $1,000 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 $1,000. 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 issuin" rel="nofollow">ing a tax-exempt bond at the bond is $1,000. 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 (3,6, or 12 percent) does the above bond sell at a discount? At a premium? 13. Mercy Medical Mega Center , a taxpayin" rel="nofollow">ing entity, has made the decision to purchase a new laser surgical device. The device costs $400,000 and will be depreciated on straight-lin" rel="nofollow">ine basis over five years to a zero salvage value. Mercy Medical could borrow the full amount at a 15 percent rate for five years. The after-tax cost of debt equals 9 percent. Alternatively, it could lease the device for five years. The before-tax lease payments per year would be $80,000. The tax rate for this MegaCenter is 40 percent. From a fin" rel="nofollow">inancial perspective, should Mercy lease the surgical device or borrow the money to purchase it and why? Part 6: The Break-Even Equation and Profit Calculation Min" rel="nofollow">inimizin" rel="nofollow">ing Errors in" rel="nofollow">in Projections Break even analysis utilizes both current and projected figures. In a rapidly changin" rel="nofollow">ing economy, there are many in" rel="nofollow">individuals who are fin" rel="nofollow">indin" rel="nofollow">ing that their in" rel="nofollow">initial break even analyses were in" rel="nofollow">incorrect. In your opin" rel="nofollow">inion, what could be done to min" rel="nofollow">inimize errors in" rel="nofollow">in projections? Break-even Analysis Sure Care Health Main" rel="nofollow">intenance Organization is seekin" rel="nofollow">ing a managed care contract with a local manufacturin" rel="nofollow">ing plant. Sure Care estimates that the cost of providin" rel="nofollow">ing preventative and curative care for the 300 employees and their families will be $36,000 per month. The manufacturin" rel="nofollow">ing company offered Sure Care a premium bid of $200 per employee per month. If Sure Care accepts this bid and contracts with the manufacturin" rel="nofollow">ing firm, will Sure Care earn a profit or loss for the year? How much? Describe the steps you used to solve this question Break-Even Equation and Profit Calculation 1. What are the formulas for: • The basis break-even equation • The basis breakeven equation expanded to in" rel="nofollow">include in" rel="nofollow">indirect costs and desired profit? 2. Explain" rel="nofollow">in the relationship between step-five costs and the relevant range. 3. Based on the product margin" rel="nofollow">in, when is it in" rel="nofollow">in the best in" rel="nofollow">interests of an organization to contin" rel="nofollow">inue or drop a service? 4. Laurie Vaden is a nurse practitioner with her own practice. She has developed contracts with several large employers to perform routin" rel="nofollow">ine physical, fitness for duty exams, and in" rel="nofollow">initial screenin" rel="nofollow">ing of on-the-job in" rel="nofollow">injuries. She currently sees 150 per month, chargin" rel="nofollow">ing 450 per visit. Her total costs are $7,500, of which $1,500 is for supplies. She has decided that she needs to in" rel="nofollow">increase profit, so she is considerin" rel="nofollow">ing raisin" rel="nofollow">ing her fee to $65. She expects to lose 10 percent of her busin" rel="nofollow">iness to competitors that charge an average of 460 per visit. Determin" rel="nofollow">ine her current and predicted: 1) revenues, 2) variable costs, and 3) total contribution margin" rel="nofollow">in. What do you recommend she do? Why? 5. Janet Gilbert is director of labs. She has some extra capacity and has contracted with some small neighborin" rel="nofollow">ing hospitals to run some of their lab tests. She has recently had a study conducted and has determin" rel="nofollow">ined that her costs of these contracts are $10,000 of which $7,000 are for supplies and items related to each test. She currently charges an average of $10,00 per lab test. She is thin" rel="nofollow">inkin" rel="nofollow">ing of lowerin" rel="nofollow">ing her price by 20 percent in" rel="nofollow">in hopes of raisin" rel="nofollow">ing her current volume of 10,000 tests by 15 percent. Determin" rel="nofollow">ine her current and predicted: 1) revenues, 2) variable costs, 3) total contribution margin" rel="nofollow">in, and 4) net in" rel="nofollow">income. What do you recommend she do? Why? 6. Shady Rest Nursin" rel="nofollow">ing Home has 100 private pay residents. The admin" rel="nofollow">inistrator is concerned about balancin" rel="nofollow">ing the ratio its private pay to non-private pay patients. Non-private pay sources reimburse an average of $100 per day whereas private pay residents pay average 100 percent of full daily charges. The admin" rel="nofollow">inistrator estimates that variable cost per resident per day is $25 for supplies, food, and contracted services and annual fixed costs are $4,562,500. • What is the daily contribution margin" rel="nofollow">in of each non-private pay resident? • If 25 percent of the residents are non-private pay, what will shady Rest charge the private pay patients in" rel="nofollow">in order to break even? • What if non-private pay payors cover 50 percent of the residents? 7. The owner of Shady Rest Nursin" rel="nofollow">ing Home in" rel="nofollow">insists that the facility earn $80,000 in" rel="nofollow">in annual profits. How much must the admin" rel="nofollow">inistrator raise the per day charge for the privately in" rel="nofollow">insured residents if 25 percent of the residents are covered by non-private pay payors? Part 7: ROI and Variance Analysis Strategic Plannin" rel="nofollow">ing and Budgetin" rel="nofollow">ing Discuss the role of strategic plannin" rel="nofollow">ing in" rel="nofollow">in the budgetin" rel="nofollow">ing process. How does it differ from short-term plannin" rel="nofollow">ing?What are the advantages and disadvantages of the participatory approach to budgetin" rel="nofollow">ing? How Far to Carry a Strategic Plan The idea of strategic plannin" rel="nofollow">ing. Experts are torn on how far out to carry such a plan; some suggest 5 years, others suggest 3 years. Identify which length of time you believe to be more beneficial to the organization and highlight the pros and cons of your decision. ROI and Variance Analysis 1. What are the major components of the plannin" rel="nofollow">ing/control cycle? 2. What are the four major budgets of a health care organization? Briefly discuss each. 3. Describe the four types of responsibility centers, in" rel="nofollow">includin" rel="nofollow">ing the characteristics of each. 4. What are transfer prices? Discuss their major disadvantages. 5. Name two fin" rel="nofollow">inancial measures used to judge the performance of in" rel="nofollow">investment centers that are not used to measure the fin" rel="nofollow">inancial performance of profit centers. 6. What does the term “variance analysis mean when applied of fin" rel="nofollow">inancial performance of health care organizations? 7. A new cardiac catheterization lab was constructed at Havea Heart Hospital. The in" rel="nofollow">investment for the lab was $450,000 in" rel="nofollow">in equipment costs and $50,000 in" rel="nofollow">in renovation costs. A desired return on in" rel="nofollow">investment is 12 percent. Once the lab was constructed, 5,000 patients were served in" rel="nofollow">in the first year and were charged $340, for each procedure. The annual fixed cost for the catheterization lab is $1 million and the variable cost is $129 per procedure. What is the catheterization labs profit? Did this profit meet its desired ROI? Why or Why not? Part 8: Cost, Pay and Profit Analysis Cost Systems For Maximum Advantage Any cost that a health care manager can authorize or directly in" rel="nofollow">influence is a controllable cost. Examples of non-controllable costs for the busin" rel="nofollow">iness in" rel="nofollow">include: taxes, in" rel="nofollow">interest, costs mandated in" rel="nofollow">in the fulfillment of contracts, costs of havin" rel="nofollow">ing the buildin" rel="nofollow">ings ADA accessible, costs associated with complyin" rel="nofollow">ing with all min" rel="nofollow">inimum standards for habitation and use of buildin" rel="nofollow">ings, costs associated with purchasin" rel="nofollow">ing and main" rel="nofollow">intain" rel="nofollow">inin" rel="nofollow">ing every piece of equipment required for contracts, and costs associated with complyin" rel="nofollow">ing with mandated safety levels. Virtually every other expense the health care manager can in" rel="nofollow">influence the amount of the expense by controllin" rel="nofollow">ing the level of the activity. 1. Which costin" rel="nofollow">ing system would be more efficient when direct materials and direct labor costs are high, and overhead costs are low and why? 2. Which costin" rel="nofollow">ing system would be more efficient when direct labor costs and direct materials are low, and overhead is high and why? 3. Explain" rel="nofollow">in how the supply chain" rel="nofollow">in and the macroeconomic environment of the health care busin" rel="nofollow">iness fit in" rel="nofollow">in with your calculations? Cost, Payment and Profit Analysis 1. Discuss the four major concerns of usin" rel="nofollow">ing the cost-to charge ration method. 2. What is the relationship between the concepts cost allocation basis as used in" rel="nofollow">in the step-down method and cost driver as used in" rel="nofollow">in ABC? 3. What is the difference between a cost object’s direct cost and its fully allocated cost? Give an example. 4. What are the advantages and disadvantages of ABC relative to the step-down method of cost allocation? 5. Name the units of service on which cost-based payers may pay providers. 6. How do copayments and deductibles reduce risk? 7. Why do providers desire “steerage”? 8. Who bears the risk under a flat is system? Why? 9. How do HMOs uses determin" rel="nofollow">ine their premiums? 10. If an HMO covered 150,000 lives, expected 25 myocardial in" rel="nofollow">infarctions (MI) to occur each year within" rel="nofollow">in the covered lives, would expect a length of stay of 4.5 days for each MI, and had to pay an average of $950 per day for each day the MI patient was in" rel="nofollow">in the hospital, what would the PMPM cost of the HMO be? What would have to be charged to the patient/employer if the HMO had admin" rel="nofollow">inistrative costs equalin" rel="nofollow">ing 10 percent of its costs and it wanted a profit margin" rel="nofollow">in of 7 percent?