MHA 702 Exam 2 comprehensive questions and verified accurate solution
(detailed & elaborated) Latest Update TEST!!
1. What is the primary goal of financial management in a healthcare organization?
ANSWER: The primary goal is to ensure the long-term financial sustainability of the organization,
allowing it to fulfill its mission of providing quality care. This involves maximizing the value of the
organization through prudent resource allocation, ensuring positive cash flow, and generating sufficient
profits (or excess revenues over expenses) for reinvestment.
2. Differentiate between accounting and finance.
ANSWER: Accounting is historically focused, recording, classifying, and summarizing financial
transactions to produce reports like income statements and balance sheets. Finance is future-oriented,
using accounting information to make strategic decisions about planning, investing, raising capital, and
managing resources.
3. What are the three main financial statements used in healthcare, and what does each report?
ANSWER: 1) Income Statement: Shows profitability over a period of time (Revenues - Expenses). 2)
Balance Sheet: Provides a snapshot of financial position at a point in time (Assets = Liabilities + Net
Assets). 3) Statement of Cash Flows: Details the sources and uses of cash from Operating, Investing, and
Financing activities.
4. Define and provide the formula for the accounting equation.
ANSWER: The fundamental equation that forms the basis of double-entry bookkeeping. It states that
what the organization owns (Assets) is always equal to what it owes (Liabilities) plus what it is worth (Net
Assets or Equity). Formula: Assets = Liabilities + Net Assets.
5. What is the difference between current and long-term assets and liabilities on a balance sheet?
ANSWER: Current Assets are expected to be converted to cash or used within one year (e.g., Cash,
Accounts Receivable, Inventory). Long-term Assets provide value for more than one year (e.g., Land,
Buildings, Equipment). Current Liabilities are obligations due within one year (e.g., Accounts Payable,
Accrued Expenses). Long-term Liabilities are debts due after one year (e.g., Mortgages, Bonds Payable).
6. What is the purpose of the Statement of Cash Flows, and what are its three sections?
,ANSWER: Its purpose is to show how changes in the balance sheet and income affect cash and cash
equivalents. The three sections are: 1) Cash from Operating Activities: Cash from core business
operations (patient services). 2) Cash from Investing Activities: Cash from buying/selling long-term
assets. 3) Cash from Financing Activities: Cash from/for lenders and owners (e.g., issuing debt, repaying
loans).
7. Define "Net Assets" and its categories in a not-for-profit healthcare organization.
ANSWER: Net Assets represent the residual interest in the assets of an organization after deducting its
liabilities (the "equity" section). For not-for-profits, it is categorized as: 1) Without Donor Restrictions:
Funds the board can use for any purpose. 2) With Donor Restrictions: Funds that must be used for a
specific purpose as stipulated by the donor.
8. What is the matching principle in accounting?
ANSWER: The matching principle states that expenses should be recorded in the same accounting period
as the revenues they helped to generate. This provides a more accurate picture of profitability. For
example, the cost of a surgical supply is matched to the revenue from the surgery, not necessarily when
the supply was paid for.
9. What is the difference between cash basis and accrual basis accounting?
ANSWER: Cash Basis: Records revenue when cash is received and expenses when cash is paid. It's simple
but can misrepresent true financial performance. Accrual Basis: Records revenue when it is *earned*
(regardless of cash receipt) and expenses when they are *incurred* (regardless of cash payment). GAAP
requires accrual basis for a true and fair view.
10. Define and calculate Net Income (or Excess of Revenues Over Expenses).
ANSWER: It is the profit of the organization for a specific period. Formula: Total Operating Revenues -
Total Operating Expenses + Non-Operating Revenues (if any) = Net Income.
11. What is a cost center, and how is its financial performance evaluated?
ANSWER: A cost center is a department or unit that does not directly generate revenue but incurs costs
(e.g., Housekeeping, HR). Performance is evaluated by comparing its *actual* costs to its *budgeted*
costs, focusing on efficiency and cost control, not profitability.
12. What is a profit center, and how is its financial performance evaluated?
,ANSWER: A profit center is a department or unit that is responsible for both its revenues and its
expenses (e.g., Cardiology Department, Orthopedics Unit). Performance is evaluated based on its
profitability (Revenues - Expenses).
13. What is the purpose of a budget in healthcare financial management?
ANSWER: A budget is a quantitative plan for the future. Its purposes include: planning and setting goals,
allocating resources, coordinating activities across departments, communicating expectations,
controlling costs by comparing actuals to the plan, and evaluating performance.
14. Differentiate between a static budget and a flexible budget.
ANSWER: A Static Budget is prepared for a single, planned level of activity (volume). It remains
unchanged, even if actual volume differs. A Flexible Budget adjusts expected costs *based on the actual
level of activity* achieved. It is a more useful tool for performance evaluation because it separates
volume-related variances from other efficiency variances.
15. What are the three main types of budgets in the master budget?
ANSWER: 1) Operating Budget: Projects revenues and expenses (the P&L budget). 2) Capital Budget:
Plans for the acquisition of major long-term assets. 3) Cash Budget: Forecasts cash inflows and outflows
to ensure liquidity.
16. What is variance analysis, and what is the difference between a favorable (F) and unfavorable (U)
variance?
ANSWER: Variance analysis is the process of comparing actual financial results to the budgeted amounts.
A Favorable (F) variance increases operating income (e.g., revenue higher than budget, expense lower
than budget). An Unfavorable (U) variance decreases operating income (e.g., revenue lower than budget,
expense higher than budget).
17. Define fixed costs, variable costs, and semi-variable (mixed) costs.
ANSWER: Fixed Costs: Do not change in total with changes in volume over a relevant range (e.g., rent,
salaried supervisor). Variable Costs: Change in total in direct proportion to changes in volume (e.g.,
medical supplies, hourly labor). Semi-Variable Costs: Have both a fixed and a variable component (e.g.,
utilities, where there's a base charge plus a usage fee).
18. What is contribution margin, and why is it a critical concept?
, ANSWER: Contribution Margin is the amount of revenue remaining after deducting all variable costs.
Formula: Revenue - Variable Costs. It is critical because it represents the amount available to *cover*
fixed costs and then contribute to profit. It is used in break-even analysis and service line decision-
making.
19. Define and calculate the Break-Even Point in volume.
ANSWER: The break-even point is the volume of service where total revenue exactly equals total costs
(both fixed and variable), resulting in zero profit. Formula: Break-Even Volume = Total Fixed Costs /
Contribution Margin per Unit.
20. What is cost allocation, and why is it necessary?
ANSWER: Cost allocation is the process of distributing the costs of support departments (e.g., Facilities,
Finance) to the revenue-producing departments that use their services. It is necessary to get a full and
accurate picture of the profitability of each profit center, as they should bear a fair share of the overhead
costs they cause.
21. Describe the step-down method of cost allocation.
ANSWER: The step-down method is a sequential process for allocating support department costs. It
begins by allocating the costs of the support department that provides the most service to *other
support departments* to all other departments (both support and revenue-producing). The process
continues, "stepping down" through support departments, but costs are never allocated back to a
department that has already had its costs allocated.
22. What is the relative value unit (RVU), and how is it used in healthcare?
ANSWER: An RVU is a measure of value used to standardize the physician work, practice expense, and
malpractice cost components of a medical service. It is the basis for the Medicare Physician Fee Schedule
and is widely used internally to measure physician productivity and allocate costs.
23. What is the time value of money (TVM), and why is it crucial in capital budgeting?
ANSWER: TVM is the concept that a dollar today is worth more than a dollar in the future due to its
potential earning capacity (interest). It is crucial in capital budgeting because investment decisions
involve cash flows spread over many years. TVM techniques allow for a fair comparison of these cash
flows occurring at different times.
24. What is discounting, and what does the discount rate represent?
(detailed & elaborated) Latest Update TEST!!
1. What is the primary goal of financial management in a healthcare organization?
ANSWER: The primary goal is to ensure the long-term financial sustainability of the organization,
allowing it to fulfill its mission of providing quality care. This involves maximizing the value of the
organization through prudent resource allocation, ensuring positive cash flow, and generating sufficient
profits (or excess revenues over expenses) for reinvestment.
2. Differentiate between accounting and finance.
ANSWER: Accounting is historically focused, recording, classifying, and summarizing financial
transactions to produce reports like income statements and balance sheets. Finance is future-oriented,
using accounting information to make strategic decisions about planning, investing, raising capital, and
managing resources.
3. What are the three main financial statements used in healthcare, and what does each report?
ANSWER: 1) Income Statement: Shows profitability over a period of time (Revenues - Expenses). 2)
Balance Sheet: Provides a snapshot of financial position at a point in time (Assets = Liabilities + Net
Assets). 3) Statement of Cash Flows: Details the sources and uses of cash from Operating, Investing, and
Financing activities.
4. Define and provide the formula for the accounting equation.
ANSWER: The fundamental equation that forms the basis of double-entry bookkeeping. It states that
what the organization owns (Assets) is always equal to what it owes (Liabilities) plus what it is worth (Net
Assets or Equity). Formula: Assets = Liabilities + Net Assets.
5. What is the difference between current and long-term assets and liabilities on a balance sheet?
ANSWER: Current Assets are expected to be converted to cash or used within one year (e.g., Cash,
Accounts Receivable, Inventory). Long-term Assets provide value for more than one year (e.g., Land,
Buildings, Equipment). Current Liabilities are obligations due within one year (e.g., Accounts Payable,
Accrued Expenses). Long-term Liabilities are debts due after one year (e.g., Mortgages, Bonds Payable).
6. What is the purpose of the Statement of Cash Flows, and what are its three sections?
,ANSWER: Its purpose is to show how changes in the balance sheet and income affect cash and cash
equivalents. The three sections are: 1) Cash from Operating Activities: Cash from core business
operations (patient services). 2) Cash from Investing Activities: Cash from buying/selling long-term
assets. 3) Cash from Financing Activities: Cash from/for lenders and owners (e.g., issuing debt, repaying
loans).
7. Define "Net Assets" and its categories in a not-for-profit healthcare organization.
ANSWER: Net Assets represent the residual interest in the assets of an organization after deducting its
liabilities (the "equity" section). For not-for-profits, it is categorized as: 1) Without Donor Restrictions:
Funds the board can use for any purpose. 2) With Donor Restrictions: Funds that must be used for a
specific purpose as stipulated by the donor.
8. What is the matching principle in accounting?
ANSWER: The matching principle states that expenses should be recorded in the same accounting period
as the revenues they helped to generate. This provides a more accurate picture of profitability. For
example, the cost of a surgical supply is matched to the revenue from the surgery, not necessarily when
the supply was paid for.
9. What is the difference between cash basis and accrual basis accounting?
ANSWER: Cash Basis: Records revenue when cash is received and expenses when cash is paid. It's simple
but can misrepresent true financial performance. Accrual Basis: Records revenue when it is *earned*
(regardless of cash receipt) and expenses when they are *incurred* (regardless of cash payment). GAAP
requires accrual basis for a true and fair view.
10. Define and calculate Net Income (or Excess of Revenues Over Expenses).
ANSWER: It is the profit of the organization for a specific period. Formula: Total Operating Revenues -
Total Operating Expenses + Non-Operating Revenues (if any) = Net Income.
11. What is a cost center, and how is its financial performance evaluated?
ANSWER: A cost center is a department or unit that does not directly generate revenue but incurs costs
(e.g., Housekeeping, HR). Performance is evaluated by comparing its *actual* costs to its *budgeted*
costs, focusing on efficiency and cost control, not profitability.
12. What is a profit center, and how is its financial performance evaluated?
,ANSWER: A profit center is a department or unit that is responsible for both its revenues and its
expenses (e.g., Cardiology Department, Orthopedics Unit). Performance is evaluated based on its
profitability (Revenues - Expenses).
13. What is the purpose of a budget in healthcare financial management?
ANSWER: A budget is a quantitative plan for the future. Its purposes include: planning and setting goals,
allocating resources, coordinating activities across departments, communicating expectations,
controlling costs by comparing actuals to the plan, and evaluating performance.
14. Differentiate between a static budget and a flexible budget.
ANSWER: A Static Budget is prepared for a single, planned level of activity (volume). It remains
unchanged, even if actual volume differs. A Flexible Budget adjusts expected costs *based on the actual
level of activity* achieved. It is a more useful tool for performance evaluation because it separates
volume-related variances from other efficiency variances.
15. What are the three main types of budgets in the master budget?
ANSWER: 1) Operating Budget: Projects revenues and expenses (the P&L budget). 2) Capital Budget:
Plans for the acquisition of major long-term assets. 3) Cash Budget: Forecasts cash inflows and outflows
to ensure liquidity.
16. What is variance analysis, and what is the difference between a favorable (F) and unfavorable (U)
variance?
ANSWER: Variance analysis is the process of comparing actual financial results to the budgeted amounts.
A Favorable (F) variance increases operating income (e.g., revenue higher than budget, expense lower
than budget). An Unfavorable (U) variance decreases operating income (e.g., revenue lower than budget,
expense higher than budget).
17. Define fixed costs, variable costs, and semi-variable (mixed) costs.
ANSWER: Fixed Costs: Do not change in total with changes in volume over a relevant range (e.g., rent,
salaried supervisor). Variable Costs: Change in total in direct proportion to changes in volume (e.g.,
medical supplies, hourly labor). Semi-Variable Costs: Have both a fixed and a variable component (e.g.,
utilities, where there's a base charge plus a usage fee).
18. What is contribution margin, and why is it a critical concept?
, ANSWER: Contribution Margin is the amount of revenue remaining after deducting all variable costs.
Formula: Revenue - Variable Costs. It is critical because it represents the amount available to *cover*
fixed costs and then contribute to profit. It is used in break-even analysis and service line decision-
making.
19. Define and calculate the Break-Even Point in volume.
ANSWER: The break-even point is the volume of service where total revenue exactly equals total costs
(both fixed and variable), resulting in zero profit. Formula: Break-Even Volume = Total Fixed Costs /
Contribution Margin per Unit.
20. What is cost allocation, and why is it necessary?
ANSWER: Cost allocation is the process of distributing the costs of support departments (e.g., Facilities,
Finance) to the revenue-producing departments that use their services. It is necessary to get a full and
accurate picture of the profitability of each profit center, as they should bear a fair share of the overhead
costs they cause.
21. Describe the step-down method of cost allocation.
ANSWER: The step-down method is a sequential process for allocating support department costs. It
begins by allocating the costs of the support department that provides the most service to *other
support departments* to all other departments (both support and revenue-producing). The process
continues, "stepping down" through support departments, but costs are never allocated back to a
department that has already had its costs allocated.
22. What is the relative value unit (RVU), and how is it used in healthcare?
ANSWER: An RVU is a measure of value used to standardize the physician work, practice expense, and
malpractice cost components of a medical service. It is the basis for the Medicare Physician Fee Schedule
and is widely used internally to measure physician productivity and allocate costs.
23. What is the time value of money (TVM), and why is it crucial in capital budgeting?
ANSWER: TVM is the concept that a dollar today is worth more than a dollar in the future due to its
potential earning capacity (interest). It is crucial in capital budgeting because investment decisions
involve cash flows spread over many years. TVM techniques allow for a fair comparison of these cash
flows occurring at different times.
24. What is discounting, and what does the discount rate represent?
