Finance
Chris Truax
System Director, Business Development
OhioHealth
Finance
• 20 Questions and reflects 10% of the
Exam
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Financial Mgmt and Financial Analysis Principles
Operating Budget Principles
Capital Budgeting Principles
Reimbursement Methodologies and Ramifications
Fundamental Productivity Measures
Financial Controls and Auditing Principles
Capitol Funding Sources
Revenue Generation
Asset Mgmt, including Facilities equipment, etc.
Financial
Accounting
• The three basic financial statements:
– Balance Sheet
– Income statement (statement of revenue and
expenses
– Statement of cash flows
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Financial
Accounting
• Balance Sheet
• Presents the financial position of the
organization at a point in time – usually at the
end of the fiscal year
• Values assigned to the assets are accounting
values and do not necessarily reflect market
values.
• Prepared in accordance with GAAP
• Major components:
– Historical cost convention
– Accrual
– “going concern”
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Financial
Accounting
• Historical cost convention
– Asset values are typically based on the value
assigned at the time of purchase (price paid)
• Accrual
– Focuses on a matching of the revenues earned and
the expenses incurred to provide those services, not
when the cash flow actually occurs
• “Going concern”
– Reflects the fact that the values assigned to the
assets are based on the premise that the organization
will continue to perform the same type of mission
(i.e.,. Health services in the case of a hospital)
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Financial
Accounting
• Basic structure of the balance sheet
– Present assets in order of liquidity and
liabilities in order of payment
– Values of the assets must be equal to the
claims of the capital supplier
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Financial
Accounting
TOTAL ASSETS
=
including:
Current Assets
Assets Limited as to
Use
Tangible Assets
Intangible Assets
TOTAL DEBT AND EQUITY
including:
Current Liabilities
Long-Term Liabilities
Equity/Net Worth/Funds
Balance
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Balance Sheet: Assets (in
thousands)
2010
2009
Current Assets:
Cash
$12,102
$6,486
Marketable securities
10,000
5,000
Net patient accounts receivable
28,509
25,927
3,695
2,302
$54,306
$39,715
$48,059
$25,837
Land
$2,954
$2,035
Buildings and equipment
85,595
77,208
$88,549
$79,243
36,099
29,694
$52,450
$49,549
$154,815
$115,101
Inventories
Total current assets
Long-term investments
Property and Equipment:
Gross fixed assets
Less: Accumulated depreciation
Net fixed assets
Total assets
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Balance Sheet: Liabilities
and Equity (in thousands)
2010
2009
$4,334
$3,345
Accounts payable
5,022
6,933
Accrued expenses
6,069
5,037
15,425
15,315
85,322
53,578
Total liabilities
100,747
68,893
Net assets (Equity)
$54,068
$46,208
$154,815
$115,101
Current Liabilities:
Notes payable
Total current liabilities
Long-term debt
Total liabilities and equity
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Financial
Accounting
• The Income Statement (statement of
revenues and expenses) reports the
revenues and expenses of the
organization over a period of time.
• The bottom line of the income statement is
captured in the equity section of the
balance sheet.
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Financial
Accounting
• Income statements are usually prepared in
accordance with GAAP, which requires the use
of the accrual basis of accounting for recognition
of revenues and expenses.
• Revenues and expenses reported include the
value of services provided regardless of whether
cash has been received
– Cash expenses such as salaries
– Noncash expenses such as:
• Depreciation
• Amortization
• Bad debt expense
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Financial
Accounting
• Noncash expenses reflect accounting
allocations of 1)previous capital
investment decisions and 2) the amount of
revenues that have been billed but will
probably not be collected in full.
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Financial
Accounting
• Charity Care
• Not shown as an expense or deduction
under the revised accounting rules.
• Charity Care, Other Deductions from
Revenue (allowance accounts and
discounts) are now shown in the footnotes
of the financial statements.
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Income Statement:
Revenues (in thousands)
2010
2009
Revenues
Net patient service revenue
Other revenue
Total revenues
$169,013 $140,896
7,079
5,704
$176,092 $146,600
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Income Statement:
Expenses (in thousands)
2010
2009
$126,223
$102,334
Supplies
20,568
18,673
Insurance
4,518
3,710
Lease
3,189
2,603
Depreciation
6,405
5,798
Provision for bad debts
2,000
1,800
Interest
5,329
3,476
$168,232
$138,394
$7,860
$8,206
Expenses:
Salaries and benefits
Total expenses
Net Income
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Financial
Accounting
• Statement of Cash Flows uses information
from balance sheet and income statements to
develop a cash flow statement that explains
changes in cash flows resulting from three
activities:
– Operating
– Investing
– Financing
• This statement is usually prepared in
accordance with GAAP.
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Financial
Accounting
Statement of Cash Flows
• Converts net income based on the accrual
basis of accounting to a cash basis by
adding noncash expenses back to the
reported net income
• Identifies cash flows from providing
services, investing activities and financial
activities
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Financial
Accounting
Ratio Analysis
• Primary financial tool used to assess the
financial condition of an organization
• Categories of ratios are:
– Liquidity: ability to meet short-term obligations
– Operating: use of assets and management
performance
– Debt: long-term survivability
– Profit: management performance and ability to meet
long-term obligations
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Ratio Analysis
• Liquidity ratios indicate an organization’s
ability to meet short-term financial
obligations.
– Current ratio
– Collection period (days in AR)
– Days cash-on-hand, all sources
– Days cash-on-hand, short-term sources
– Average payment period
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Ratio Analysis
• Profitability ratios indicate an
organization’s ability to survive and grow
by measuring the relationship of revenues
to expenses.
– Operating margin
– Total margin
– Return on net assets
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Ratio Analysis
• Asset efficiency ratios indicate an
organization’s ability to be efficient by
measuring the relationship between
revenue and assets [note: total revenue
includes net non-operating gains].
– Total asset turnover
– Age of plant
– Fixed asset turnover
– Current asset turnover
– Inventory turnover
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Ratio Analysis
• Capital structure ratios indicate that
organization’s long-term liquidity by
measuring a variety of relationships to
capital.
– Net asset financing
– Long-term debt to net assets
– Debt service coverage
– Cash flow-to-debt
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Operating
Indicators
• Measure financial performance related to
operations.
– Average length-of-stay (LOS)
– Occupancy rate
– Outpatient revenue as a percentage of total
patient revenue
– FTE’s per occupied bed
– Salary per FTE
– Compensation costs per discharge
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Financial
Accounting
• Ratio Analysis for Managed Care Organizations – focus
on two major categories of expense and how they relate
to the premium dollar
Medical Claims Expense Ratio =
Total Medical Claims Expense
Premium Revenue
Administrative Expense Ratio =
Non-health Service Expenses
Total Operating Revenue
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Management
Accounting
• Management Accounting’s primary focus
is the determination of the cost of a
particular decision.
• “Cost” is ambiguous and its meaning
depends on the type of decision being
made.
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Cost
Classifications
• In the long-run, all costs are variable, and
hence these cost classifications hold only
in the short-run, say, for one year.
• Also, no costs are fixed throughout an
indefinite range of volumes. Thus, the
concept of cost classifications according to
volume must be applied within some
relevant range of patient volume.
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Management
Accounting
Key Calculations for Total Cost Decisions
Total Cost = Total Fixed Cost + Total Variable
Costs
Per-unit costs are averages
Per unit costs = TFC/Q + TVC/Q
(Q = Services provided)
It is important to stress that whenever you have
fixed costs, you can not determine per-unit costs
without specifying a volume of output.
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Management
Accounting
Contribution Margin Approach
• The relationship between fixed and
variable costs and profit can also be
expressed in terms of the contribution
margin approach:
• Contribution Margin = Price after
Discounts – Variable Cost Per Unit
CM = P – VCU
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Management
Accounting
• Relationship between CM and the Income
Statement
$20
-8
$12
Average revenue per patient visit after discount
Average variable cost per patient visit
Contribution margin (CM) per patient visit
Total Fixed Costs (TFC) = $240,000
BEQ (Break Even Quantity) = TFC/CM = $240,000/12
Total revenue
(20,000 x $20)
Total variable costs
(20,000 x $8)
Total contribution margin (20,000 x $12)
Total fixed costs
Excess of revenue over expenses
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$400,000
$160,000
$240,000
$240,000
$ 0
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Management
Accounting
Contribution Margin approach is used
determine:
• Break-even points/profit
• Quantity
• Prices
• Cost categories
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Financial
Management
Sources of Capital
• Equity (or fund balance)
Contributed capital
Retained earnings
• Debt
Short-term (trade credit)
Long-term (notes, bonds, leasing)
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Financial
Management
Risk of Debt
• As the amount of debt increases, the risk
to the lender increases and higher interest
rates follow
• To maintain a stable risk profile in the
capital structure, then, increased use of
debt requires that additional equity also be
obtained to keep the relative amounts of
each source within board-established units
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Financial
Management
Weighted Average Cost of Capital Model
(WACC)
• Method to measure the costs of various
services of capital and the impact of the
capital structure
• The relative amount of debt and equity in
the capital structure and the cost of each
source in the marketplace are used to
determine the weighted cost
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Financial
Management
Evaluation Techniques
• Economic evaluation techniques (adjusted
for the time value of money)
– Net Present Value
– Internal Rate of Return
• Accounting evaluation techniques (not
adjusted for the time value of money)
– Accounting Rate of Return
– Pay Back
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Financial
Management
Net Present Value (NPV)
The different between the discounted cash
inflows and discounted cash outflows over
the life of the investment
Internal Rate of Return (IRR)
The discount rate, r, which, when used to
discount a series of cash inflows and
outflows, makes the NPV of those cash
flows equal to zero.
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Financial
Management
Accounting Rate of Return
The average increase in income reported
on the financial statement divided by the
total or average investment
Pay Back
The amount of time it takes to recover the
cash outflows of the investment from the
cash inflows
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Finance
Ready for some test questions?
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Finance Test
Questions
Which of the following is a unit measure
commonly used to determine physicians’
clinical productivity?
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RVU
CMS
IPO
CPU
Finance Test
Questions
Which of the following third-party
reimbursement methods provides the largest
financial incentive for the provider to reduce
cost?
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Charge-based
Cost-based
Prospective payment
Per diem
Finance Test
Questions
Statements and earnings, financial
positions, changes in financial position and
retained earnings are required to be
submitted yearly by all:
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Publically owned healthcare organizations
Privately owned healthcare organizations
Government owned healthcare organizations
Faith-based owned healthcare organizations
Finance Test
Questions
Which of the following is an Example of a
capital expenditure?
– Land that is purchased for resale
– Surgical equipment with a useful life of six
months
– A building with a useful life of 20 years
– Medical supplies used for patient care
Finance Test
Questions
If the amount of charity care increased from
one reporting period to the next, which of the
following would occur?
– Provision for bad debts would increase
– Unrestricted net assets would increase
– Unrestricted net assets would neither,
increase or decrease
– Unrestricted net assets would decrease
Finance Test
Questions
Which would be a reasonable basis on
which to allocate administrative overhead
costs?
– Salaries
– Amount of supplies used
– Hours worked
– Square footage
Finance Test
Questions
The effective cost of debt is roughly the same
for both not-for-profit and investor-owned
organizations because:
– Both types of organizations can issue tax-exempt
debt
– The interest rate is the same on both tax-exempt
and regular debt
– Neither type of organization can issue tax-exempt
debt
– The tax deductibility of interest for investor-owned
firms offsets the lower coupon rate on tax-exempt
debt.
Finance Test
Questions
Which of the following statements best
describes the statistics budget?
– It combines volume and expense rates to
forecast costs
– It is a profit forecast for the coming year
– It combines volume and reimbursement data
to forecast revenues
– It provides input date for other budgets
Finance Test
Questions
Which of the following is an Example of an
asset?
– Accounts payable
– Accrued employee benefits
– Property, plant, and equipment
– Unrealized gain
Finance Test
Questions
• Which statement about short-term debt
reduces liquidity?
– Increased use of short-term debt reduces
liquidity
– Short-term debt provides certainty about
interest costs over time
– The interest rates for short-term debt are
typically higher than interest rates for longterm debt
– An organization that relies on short-term
debt replaces the need for working capital
Finance Test
Questions
• Cost accounting is an important tool which
enables the CFO to:
a.Meet Joint Commission fiscal
requirements
b.Ensure supplies are competitively
purchased
c.Determine the actual cost of providing
patient care
d.Improve revenue cycle returns
Finance Test
Questions
• What does a liquidity ratio measure?
a.A firm’s ability to meet its current
obligations in a timely manner
b.Size of dividends to be paid to
shareholders
c.The percent of total funds provided by
creditors
d.Days in accounts receivable
Finance Test
Questions
• The real value of financial statements lies in
the fact they can be used to help:
a.Predict the firm’s future financial condition
b.Compute total margin versus periodic gain
c. Relate the industry average to net profit/loss
over time
d.Understand that a large portion of a hospitals
net income may come from non-operating
gains
Finance Test
Questions
• Facing struggles such as declining profit
margins, nonprofit healthcare
organizations have become more
dependent on what source for financing
capital needs?
a.Philanthropy
b.Bond financing
c.Capital leases
d.Operational leases
Finance Test
Questions
• You work for a county organization that
has decided to issue bonds to fund a new
building. What type of bond would be sold
on behalf of your organization?
a.Mortgage bond
b.Corporate bond
c.Capital bond
d.Municipal bond
Finance Test
Questions
• On a balance sheet, what does the
difference between total current assets
and total current liabilities indicate?
a.Cash on hand
b.Net working capital
c.Liquid assets
d.Equity
Finance Test
Questions
• Budgets for new capital expenditures
include requests for:
a.Infrastructure
b.Wage adjustments
c.New employee insurance plans
d.New gain share agreement with staff
physician
Finance Test
Questions
• The Capital Asset Pricing Model (CAPM), an
equilibrium model, describes the relationship
between which of the following?
a.Market risk and required rate of return
b.Expected rate of return and actual rate of
return
c. Price and market risk
d.Expected rate of return and required rate of
return
Finance Test
Questions
• Which of the following is not considered
part of the labor budget?
a.Staff Salaries
b.Hourly wages
c.Employee benefits
d.Contract staff expenses
Finance Test
Questions
• What in the revenue cycle process is a
major impediment to prompt payment?
a.Payment receipt and posting
b.Claims submission
c.Poor financial counseling
d.Claim denial
Finance Test
Questions
• When evaluating capital budget
performance, what is the best indicator of
operating leverage?
a.Debt to capitalization ratio
b.Expense ratio
c.Average age of plant
d.Depreciation ratio
Finance Test
Questions
• An analysis of proposed capital investment
typically includes all of the following
except:
a.Cost of capital
b.Cash flow projections
c.Liquidity ratio
d.Risk assessment
Finance Test
Questions
• Revenue cycle billing management typically
includes what broad activities?
a. Billing and collections for inpatient, outpatient and
surgical services
b. Claims processing, denial management and
claims payment
c. Processing accounts payable, denial management
and billing for outpatient services
d. Activities before services are rendered, activities
that occur simultaneously with the services and
activities after services are rendered
Finance Test
Questions
• Under the regulations of the IRS, a tax
exempt entity:
a.Must provide a private benefit to those
institutions operating or affiliated with the
entity
b.Must limit the benefit to any private individual
c. Must provide a public benefit to the
community
d.Can minimize penalties if it limits private
benefits to less than 50%
Finance Test
Questions
• Bundled pricing (paying a single fee for all services)
for such services as total hip replacement or coronary
artery bypass surgery affects physician-hospital
relationships by:
a. Reducing the need to devote administrative effort to
measuring outcomes and performance indicators
b. Putting the physician and hospital at each other’s
throat fighting over distribution of the fee
c. Promoting efforts to collaborate and integrate efforts to
provide more efficient care
d. Guaranteeing that only top quality physicians will be
allowed to participate in such programs
Finance Test
Questions
• Which of the following is an Example of
direct costs?
a.Utility bills
b.Parking operations
c.Debt service
d.Drug prescriptions
Finance Test
Questions
• What are the three basic categories of
quantitative performance measures used
in conventional accounting systems?
a.Market share, customer satisfaction, and
quality
b.Demand, sales, and cost
c.Demand, cost, and output/productivity
d.Services rendered, market share, and
access
Finance Test
Questions
• Under capitated payment system, the risk
sharing arrangements involve which
parties?
a.Insurers and patients
b.Physicians and purchasers
c.Hospitals and patients
d.Hospitals and insurers
Finance Test
Questions
• Which concept of profitability analysis listed
below is correct?
a.Internal Rate of Return (IRR) measures a
project’s percentage of cash flow
b.Net Present Value (NPV) is a profitability
measure that uses discounted cash flow
c. Modified Internal Rate of Return (MIRR) is a
less accurate measure than a project’s actual
rate of return
d.Profitability Return Rate (PRR) provides the
most accurate measure
Finance Test
Questions
• Which of the following must be included
when determining a capital project’s
incremental cash flow?
a.Opportunity costs
b.Cash inflows
c.Inflation
d.Internal rate of return
Finance Test
Questions
• The primary purpose of generally accepted account principles
(GAAP) in healthcare settings is to:
a. Provide regulators with increased access to high quality
financial statements of organizations within their jurisdiction
b. Ensure that financial information that is reported to outsiders
is consistent across businesses and presented in a manner
that facilitates interpretation and judgments
c. Allow interested individuals a rapid means of collecting
financial data about hospitals and managed care
organizations
d. Facilitate the training of accountants and other finance
professionals in the fundamentals of hospital and health
services accounting
Finance Test
Questions
• The Statement of Cash Flows is typically
organized into three sections: Cash Flow
From Operations; Cash Flow From
Investing Activities; and Cash Flow From:
a.Bad Debt Recovery
b.Regulatory Recapture
c.Financing Activities
d.Donations & Foundation Support
Finance Test
Questions
• Which of the following combines data from
a balance sheet and an income statement
to create a single number that facilitates
easy interpretation?
a.Financial ratio analysis
b.Acid test ratio
c.Operating margin ratio
d.Cash flow analysis
Finance Test
Questions
• If a CEO wanted to look at a “snapshot” of
the financial condition of the healthcare
organization, he/she would review which
of the following?
a.Income Statement
b.Balance Sheet
c.Retained Earnings Statement
d.Investment Portfolio
Finance Test
Questions
• Where should charity care be shown in a
healthcare organization’s financial
statement?
a.In the balance sheet
b.In the statement of operations
c.In the statement of changes in net assets
d.In the notes to the financial statements
Finance Test
Questions
• Which financial statement is updated daily
to reflect changes in assets or composition
of financing?
a.The flash report
b.The balance sheet
c.The statement of operations
d.The statement of cash flows
Finance Test
Questions
• Controlling the costs of accounts
receivable is heavily affected by:
a.The time or length of the payment cycle
b.The dollar amount of credit granted to
individuals
c.The total dollar amount of receivables
carried on the books
d.Working capital management
Finance Test
Questions
• One of the techniques most frequently used
in industry to aid management in interpreting
a firm’s balance sheet is computation of the
acid-test ratio, which is the ratio of:
a.Current assets to current liabilities
b.Total assets to total liabilities
c. Cash to short-term department
d.Cash, marketable securities, and accounts
receivable to current liabilities
Finance Test
Questions
• Memorial Hospital offers a screening test as
a public service for a $0.50 per test. Variable
costs per unit are $0.32. Fixed costs are
$43,200 per month for the department
performing the test. It is the only test done by
this special department. The break-even
point in tests is:
a.240,000 tests
b.172,000 tests
c. 135,000 tests
d.86,400 tests
Finance Test
Questions
• The asset turnover ratio is useful in
measuring managerial performance
because it indicates the:
a.Amount of resources required to generate
a dollar of revenue
b.Profitability per dollar of revenue
c.Effectiveness of capital structure decisions
d.Effective use of current assets
Finance Test
Questions
Which of the following is the depreciation
method that best recognizes changes in the
general purchasing power of the dollar
and/or changes in the replacement cost of
specific assets?
A.
B.
C.
D.
Declining-balance depreciation.
Straight-line depreciation
Price-level depreciation.
Sum of the years’ digits depreciation.
Finance Test
Questions
When third-party policies and programs impede
the healthcare facility’s fiscal capacity to renovate
and model its plant as routinely scheduled, the
healthcare facility, to protect itself, should first:
A. Delay capital improvements until funds are available.
B. Reduce the level of operating services.
C. Limit the number of admissions from the selected
third-party payments sources.
D. Resort to the regulatory agency to obtain a waiver.
Finance Test
Questions
Under generally accepted accounting
standards, bad debts are reported as a/an:
A.
B.
C.
D.
Operating expense
Deduction from net revenue
Contractual allowance
Deduction from gross revenue
Finance
Study up!
Get additional resources if needed.
Understand your financial ratios, and how
they relate to each other.
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