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business
introduction to accounting
Questions and Answers of
Introduction To Accounting
What is the economic interpretation of the corporate cost of capital?
Is the corporate cost of capital the same for all firms? Explain your answer.
For any given firm, can the corporate cost of capital be used as the hurdle rate for all projects under consideration? Explain your answer.
Briefly define the following cash flow estimation concepts.a. Incremental cash flowb. Cash flow versus accounting incomec. Sunk costd. Opportunity coste. Net working capitalf. Strategic value g.
Critique this statement: NPV is a better measure of project profitability than IRR because it leads to better capital investment decisions.
Describe three alternative current asset investment policies. Explain each policy’s risk and return characteristics.
a. What is the difference between permanent assets and temporary assets?b. If a firm uses the maturity matching approach to current asset financing, how will its temporary assets be financed?c.
a. Give two reasons why businesses hold marketable securities.b. Which types of securities are most suitable for holding as marketable securities?c. Suppose Southwest Regional Medical Center has just
a. Define average collection period.b. How is it used to monitor a firm’s accounts receivable?c. What is an aging schedule?d. How is it used to monitor a firm’s accounts receivable?
Explain briefly how businesses can obtain secured short-term financing.
Suppose one of the suppliers to Seattle Health System offers terms of 3/20, net 60.a. When does the system have to pay its bills from this supplier?b. What is the approximate cost of the costly trade
Langley Clinics, Inc., buys $400,000 in medical supplies each year(at gross prices) from its major supplier, Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is
Milwaukee Surgical Supplies, Inc., sells on terms of 3/10, net 30.Gross sales for the year are $1,200,000 and the collections department estimates that 30 percent of the customers pay on the tenth
Fargo Memorial Hospital has annual net patient service revenues of $14,400,000. It has two major third-party payers, plus some of its patients are self-payers. The hospital’s patient accounts
One asset management ratio, the inventory turnover ratio, is defined as sales (i.e., revenues) divided by inventories. Why would this ratio be more important for a medical device manufacturer or a
a. Assume that Beverly Enterprises and Manor Care, two operators of nursing homes, have fiscal years that end at different times—say, one in June and one in December. Would this fact cause any
a. What is the difference between trend analysis and comparative analysis?b. Which one is more important?
What is EVA, and what does it measure?
Distinguish between operating and financial leases. Would you be more likely to use an operating lease to finance a piece of diagnostic equipment or a hospital building?
Leasing companies often promote the following two benefits of leasing.Critique the merits of each hypothesized benefit.a. Leasing preserves a business’s liquidity because it avoids the large cash
Assume that there were no IRS restrictions on what type of transaction could qualify as a lease for tax purposes. Explain why some restrictions should be imposed.
In the Nashville Radiology Group example given in the chapter, we assumed that the lease did not have a cancellation clause. What effect would a cancellation clause have on the analysis?
Discuss some of the asymmetries that drive lease transactions.
Describe the mechanics of the discounted cash flow (DCF) approach to business valuation.
Describe the mechanics of the market multiple approach to business valuation.
Which approach do you think is best for valuing a business: the DCF approach or the market multiple approach? Explain the rationale behind your answer.
a. What is a cost pool?b. What is a cost driver?c. How is the cost allocation rate determined?
Effective cost drivers, and hence the resulting allocation system, must have what two important attributes?
How does activity-based costing (ABC) differ from traditional costing approaches?
The Housekeeping Services department of Ruger Clinic, a multispecialty practice in Toledo, Ohio, had $100,000 in direct costs during 2007.These costs must be allocated to Ruger’s three
Refer to Problem 6.1. Assume that the three patient services departments are Adult Services, Pediatric Services, and Other Services. The patient services revenue and hours of housekeeping services
Assume that the hospital uses the direct method for cost allocation.Furthermore, the cost driver for General Administration and Financial Services is patient services revenue, while the cost driver
Assume that the hospital uses salary dollars as the cost driver for General Administration, housekeeping labor hours as the cost driver for Facilities, and patient services revenue as the cost driver
Now assume that the hospital uses the step-down method for cost allocation, with salary dollars as the cost driver for General Administration, housekeeping labor hours as the cost driver for
Return to the direct method of cost allocation and use the same cost drivers as specified in Problem 6.4 for General Administration and Facilities. However, assume that $2,000,000 of Financial
Consider the following data for a clinical laboratory:a. Using ABC techniques, determine the allocation rate for each activity.b. Now, using this allocation rate, estimate the total cost of
a. Using a healthcare provider (e.g., a hospital) to illustrate your answer, explain the difference between a price setter and a price taker.b. Can most providers be classified strictly as either a
Explain the essential differences between full cost and marginal cost pricing strategies.
What is the role of information systems in pricing decisions?
Compare and contrast the following three methods for developing capitation rates: fee-for-service approach, cost approach, and demographic approach.
a. What is scenario analysis as applied to pricing and service decisions?b. Why is it such an important part of the process?
a. Define a relative value unit (RVU).b. Explain how RVUs can be used to set prices on individual services.
The Audiology department at Randall Clinic offers many services to the clinic’s patients. The three most common, along with cost and utilization data, are:a. What is the fee schedule for these
Assume that Valley Forge Hospital has only the following three payer groups:The hospital’s fixed costs are $38 million.a. What is the hospital’s net income?b. Assume that half of the 100,000
Bay Pines Medical Center estimates that a capitated population of 50,000 would have the following base case utilization and total cost characteristics:In addition to medical costs, Bay Pines
If you were the CEO of Bayside Memorial Hospital, would you advocate a top-down or bottom-up approach to budgeting? Explain your rationale.
a. Explain the relationships among the static budget, flexible budget, and actual results.b. Assume that a group practice has both capitated and fee-for-service(FFS) patients. Furthermore, the number
Here are the 2007 revenues for the Wendover Group Practice Association for four different budgets, in thousands of dollars:a. What does the budget data tell you about the nature of Wendover’s
Here are the budgets of Brandon Surgery Center for the most recent historical quarter, in thousands of dollars:The center assumes that all revenues and costs are variable and hence tied directly to
Refer to Carroll Clinic’s 2007 operating budget contained in Table 8.3.Instead of the actual results reported in Table 8.4, assume the results reported below:a. Construct Carroll’s flexible
Great Lakes Health Network’s net income increased from $3.2 million in 1997 to $6.4 million in 2007. The total growth rate over the ten years is 100 percent, while the annual growth rate is only
Would you rather have a savings account that pays 5 percent compounded semiannually or one that pays 5 percent compounded daily? Explain your answer.
Explain the concept of return on investment (ROI) and the two different approaches to measuring ROI.
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
Explain the difference between portfolio risk and diversifiable risk.
The four fundamental factors that affect the supply of and demand for investment capital, and hence interest rates, are productive opportunities, time preferences for consumption, risk, and
a. What is a yield curve?b. Is the yield curve static, or does it change over time?c. What is the difference between a normal yield curve and an inverted yield curve?d. What impact does the yield
Briefly describe the following types of debt:a. Term loanb. Bondc. Mortgage bondd. Senior debt; junior debte. Debenturef. Subordinated debenture g. Municipal bond
a. • What are the three primary bond rating agencies?• What do bond ratings measure?• How do investors interpret bond ratings?• What is the difference between an A-rated bond and a B-rated
What is credit enhancement?
What three factors primarily influence the general level of interest rates?
a. What is price risk?b. What is reinvestment rate risk?
State whether this statement is 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
What is the purpose of the book?
What are some forms of regulation used in the health services industry?
Briefly, what is the organization of this book?
a. What is the primary goal of investor-owned corporations?b. What is the primary goal of most not-for-profit healthcare corporations?c. Are there substantial differences between the finance goals of
Describe provider incentives and risks under each of the following reimbursement methods:a. Cost-basedb. Charge-based (including discounted charges)c. Per procedured. Per diagnosise. Per diemf.
Assume that Provident Health System, a for-profit hospital, has $1 million in taxable income for 2007, and its tax rate is 30 percent.a. Given this information, what is the firm’s net income?
A firm that owns the stock of another corporation does not have to pay taxes on the entire amount of dividends received. In general, only 30 percent of the dividends received by one corporation from
John Doe is in the 40 percent personal tax bracket. He is considering investing in HCA bonds that carry a 12 percent interest rate.a. What is his after-tax yield (interest rate) on the bonds?b.
George and Margaret Wealthy are in the 48 percent tax bracket, considering both federal and state personal taxes. Norman Briggs, the CEO of Community General Hospital, has been aggressively pursuing
a. What is a stakeholder?b. What stakeholders are most interested in the financial condition of a healthcare provider?
Briefly describe the following concepts as they apply to the preparation of financial statements:a. Accounting entityb. Going concernc. Accounting periodd. Objectivity and reliabilitye. Monetary
Explain the difference between cash and accrual accounting. Be sure to include a discussion of the revenue recognition and matching principles.
a. What is the difference between gross revenues and net revenues?(Hint: Think about discounts and charity care.)b. What is the difference between patient service revenue and other revenue?c. What is
a. What is net income?b. Why is net income called the bottom line?c. What is the difference between net income and cash flow?d. Is financial condition more closely related to net income or to cash
Entries for the Warren Clinic 2007 income statement are listed below in alphabetical order. Reorder the data in proper format. Bad debt expense Depreciation expense General/administrative expenses
Consider the following income statement:a. How does this income statement differ from the one presented in Table 3.1?b. Did BestCare spend $367,000 on new fixed assets during fiscal year 2007? If
Consider this income statement:a. How does this income statement differ from the ones presented in Table 3.1 and Problem 3.2?b. Why does Green Valley show a provision for income taxes while the other
Great Forks Hospital reported net income for 2007 of $2.4 million on total revenues of $30 million. Depreciation expense totaled $1 million.a. What were total expenses for 2007?b. What were total
Assume that Mainline Homecare, a for-profit corporation, had exactly the same situation as reported in Problem 3.5. However, Mainline must pay taxes at a rate of 40 percent of pretax income. Assuming
a. What is the difference between the income statement and balance sheet in regards to timing?b. What is wrong with this statement: “The clinic’s cash balance for 2007 was $150,000, while its net
a. What is the difference between liabilities and equity?b. What makes a liability a current liability?c. Give some examples of current liabilities.d. What is the difference between long-term debt
Middleton Clinic had total assets of $500,000 and an equity balance of$350,000 at the end of 2006. One year later, at the end of 2007, the clinic had $575,000 in assets and $380,000 in equity. What
The following are selected entries for Warren Clinic for December 31, 2007, in alphabetical order. Create Warren Clinic’s balance sheet. Accounts payable Accounts receivable, net Cash $ 20,000
Consider the following balance sheet:a. How does this balance sheet differ from the one presented in Table 4.1 for Sunnyvale?b. What is BestCare’s net working capital for 2007?c. What is
Consider this balance sheet:a. How does this balance sheet differ from the ones presented in Table 4.1 and Problem 4.5?b. What is Green Valley’s net working capital for 2007?c. What is Green
Explain the differences between fixed costs, semi-fixed costs, and variable costs?
Total costs are made up of what components?
a. What is operating leverage?b. How is it measured?
What are the critical differences in profit analysis when conducted in a capitated environment versus a fee-for-service environment?
a. What cost structure is best when a provider is capitated? Explain.b. What cost structure is best when a provider is reimbursed mostly by fee for service? Explain.
Assume that a radiologist group practice has the following cost structure:Furthermore, assume that the group expects to perform 7,500 procedures in the coming year.a. Construct the group’s base
General Hospital, a not-for-profit acute care facility, has the following cost structure for its inpatient services:The hospital expects to have a patient load of 15,000 inpatient days next year.a.
You are considering starting a walk-in clinic. Your financial projections for the first year of operations are as follows:Assume that all costs are fixed, except supply costs, which are
Review the walk-in clinic data presented in Problem 5.5. Construct projected profit and loss statements at volume levels of 8,000, 9,000, 10,000, 11,000, and 12,000 visits.a. Assume that the base
Grandview Clinic has fixed costs of $2 million and an average variable cost rate of $15 per visit. Its sole payer, an HMO, has proposed an annual capitation payment of $150 for each of its 20,000
What is the difference between robots and robotics?
What is the difference between robotics and artificial intelligence?
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