Questions and Answers of Financial Management Theory

a. What is the accounting identity?b. What is the implication of the accounting identity for the numbers on a balance sheet?c. What does the accounting identity tell us about a business’s equity?
a. What are assets?b. What are the three major categories of assets?
a. What makes an asset a current asset?b. Provide some examples of current assets.c. What is net working capital, and what does it measure?
a. On the balance sheet, what is the difference between long-term investments and property and equipment?b. What is the difference between gross fixed assets and net fixed assets?c. How does
a. What is the difference between liabilities and equity?b. What makes a liability a current liability?c. Provide some examples of current liabilities.d. What is the difference between long-term debt
a. Explain the difference between the equity section of a not-forprofit business and an investor-owned business.b. What is the relationship between net income on the income statement and the equity
What is fund accounting, and why is it important to some healthcare providers?
a. What is the statement of cash flows, and how does it differ from the income statement?b. What are the three major sections of the statement of cash flows?c. What is the bottom line of the
Middletown Clinic had total assets of $500,000 and an equity balance of $350,000 at the end of 2019. One year later, at the end of 2020, the clinic had $575,000 in assets and $380,000 in equity.What
San Mateo Healthcare had an equity balance of $1.38 million at the beginning of the year. At the end of the year, its equity balance was $1.98 million.a. Assume that San Mateo is a not-for-profit
Here is financial statement information on four not-for-profit clinics:Fill in the missing values labeled a through l. Pittman Rose Beckman Jaffe December 31, 2019: Assets $80,000 $100,000 g $150,000
The following are selected account balances for Warrenton Clinic as of December 31, 2020, in alphabetical order. Create Warrenton Clinic’s balance sheet. Accounts payable Accounts receivable, net $
Consider the following balance sheet:a. How does this balance sheet differ from the one presented in exhibit 4.1 for Sunnyvale?b. What is BestCare’s net working capital for 2020?Exhibit 4.1c. What
Consider this balance sheet:a. How does this balance sheet differ from the ones presented in exhibit 4.1 and problem 4.5?b. What is Blue Sky’s net working capital for 2020?c. What is Blue Sky’s
Given below are balance sheets as of December 31, 2020, and December 31, 2019, for James Hospital. Using the balance sheets and the additional information provided, complete the income statement of
Oak Street Clinic, a not-for-profit, began 2020 with the following account balances on January 1:During 2020, the accounting clerk recorded the following transactions:Oak Street Clinic’s year-end
What are the primary differences between financial and managerial accounting?
What is meant by the term cost?
Define the term relevant range.
Explain the features and provide examples of fixed and variable costs.
How does the time period affect the estimation of fixed and variable costs?
What is meant by the term underlying cost structure?
Construct a simple table like the one in exhibit 5.1 for medical supplies with a relevant range of 0 to 500 procedures (unit), $20 in variable costs per procedure, and $500,000 fixed costs. Discuss
Sketch and explain a simple graph similar to the one in exhibit 5.2 to match your table.Exhibit 5.2 Costs ($) Total Costs 150,000 Fixed Costs Total Variable Costs Volume (Number of Tests)
Construct a simple P&L statement like the one shown in exhibit 5.5 and discuss its elements.Exhibit 5.5 Total revenues ($100 75,000) $7,500,000 Total variable costs ($28.18 x 75,000) 2,113,500
Sketch and explain a simple graph to match your P&L statement.
Define and explain the concept of contribution margin.
What is the purpose of breakeven analysis?
What is the equation for volume breakeven?
Why is breakeven analysis often conducted in an iterative manner?
What is the difference between accounting breakeven and economic breakeven?
What is the impact of a discount contract on fixed costs, total variable costs, and the breakeven point?
What is meant by marginal analysis?
What is meant by the statement “Marginal analysis is made more complicated by long-term considerations”?
Do marginal costs always consist only of variable costs?
Under capitation, what is the difference between a CVP graph with the number of visits on the x axis and one with the number of members on the x axis?
What is unique about the contribution margin under capitation?
Why is utilization management so important in a capitated environment?
Why is the number of members so important in a capitated environment?
Explain this statement: “To minimize financial risk, match the cost structure to the revenue structure.”
What cost structure would minimize risk if a provider had all feefor-service reimbursement?
What cost structure would minimize risk if a provider were entirely capitated?
What are real-world constraints on creating matching cost structures?
Explain the differences between fixed costs and variable costs.
What components make up total costs?
a. What is cost-volume-profit (CVP) analysis?b. Why is it so useful to health services managers?
a. Define contribution margin.b. What is its economic meaning?
a. Write out and explain the equation for volume breakeven.b. What role does contribution margin play in this equation?
What elements of profit analysis change when a provider moves from a fee-for-service to a discounted fee-for-service environment?
What are the critical differences in profit analysis when it is conducted in a capitated environment versus a fee-for-service environment?
How do provider incentives differ when the provider moves from a fee-for-service to a capitated environment?
a. What cost structure is best when a provider is primarily capitated? Explain.b. What cost structure is best when a provider is reimbursed primarily by fee-for-service? Explain.
Consider the CVP graphs below for two providers operating in a fee-for-service environment:a. Assuming the graphs are drawn to the same scale, which provider has the greater fixed costs? The greater
Consider the data in the table below for three independent health services organizations:Fill in the missing data indicated by question marks. Total Fixed Total Revenues Variable Costs Costs Costs
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 (medical and
Review the walk-in clinic data presented in problem 5.5. Construct projected P&L statements at volume levels of 8,000, 9,000, 10,000, 11,000, and 12,000 visits.a. Assume that the base case
Triangle Health Center currently provides 1,000 visits per year at a price of $50 per visit. The variable cost per visit (variable cost rate)is $30, and total fixed costs are $15,000. The business
Charity Hospital, a not-for-profit, has a maximum capacity of 15,000 discharges per year. Variable patient service costs are $495 per discharge. Variable general and administrative costs are $5 per
What is the difference between direct and indirect costs?
Give several examples of indirect and direct costs for a hospital’s emergency services department.
What is meant by the term cost allocation? By the term full costs?
What is the goal of cost allocation?
Why is cost allocation important to health services managers?
What are the definitions of a cost pool, a cost driver, and an allocation rate?
Under what conditions should a single overhead department be divided into multiple cost pools?
On what theoretical basis are cost drivers chosen?
What two characteristics make an effective cost driver?
What are the four steps in the cost allocation process?
Explain how they differ.
Which method do you think is the most accurate? Which is the least accurate?
Briefly outline the allocation procedures used by Kennington Hospital.
What underlying characteristic creates a good cost driver?
What are the two properties of an effective cost driver?
What is the most important organizational benefit derived from the selection of an effective cost driver?
What are the advantages of changing from a poor cost driver to a better one?
What are the costs involved in the change?
Why is good cost allocation critical to good decision-making?
What are the two primary tests that good cost allocation processes pass?
Why is the cost allocation process important to health services managers?
What are the primary differences between direct and indirect costs?
a. What are the three primary methods of cost allocation?b. What are the differences among them?
a. What is a cost pool?b. What is a cost driver?c. How is the cost allocation rate determined?
Under what circumstances should an overhead department be divided into multiple cost pools?
Effective cost drivers, and the resulting allocation system, must have what two important attributes?
Briefly describe (illustrate) the cost allocation process. (To keep things simple, use the direct method for your illustration.)
The housekeeping services department of Ruger Clinic, a multispecialty practice, had $100,000 in direct costs in 2020.These costs must be allocated to Ruger’s three revenue-producing patient
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 for
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 the general administration and facilities departments. However, assume that $2,000,000 of
Assume the hospital uses the direct method for cost allocation.Furthermore, the cost driver for general administration is patient services revenue, the cost driver for maintenance is space
Assume that the hospital uses salary dollars as the cost driver for general administration and employee benefits, and space utilization as the cost driver for maintenance.a. What are the appropriate
Briefly describe the following service costing methods:a. Cost-to-charge ratio (CCR)b. Relative value unit (RVU)c. Activity-based costing (ABC)
Explain how time-driven activity-based costing (TDABC) differs from the other three methods.
What is the difference between a price taker and a price setter?
Are healthcare providers generally price takers or price setters exclusively? Explain your answer.
Describe two common pricing strategies used by price setters and their implications for financial survivability.

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