C428 - Financial Management in Healthcare Organizations: Test Bank
Section 1: Healthcare Finance Environment & Accounting Fundamentals
1. The primary financial objective for a not-for-profit healthcare organization is
best described as:
a) Maximizing shareholder wealth.
b) Generating sufficient excess revenue to ensure financial viability and fulfill its
community mission.
c) Minimizing the cost of all services provided.
d) Achieving the highest possible patient satisfaction scores.
Answer: b) Generating sufficient excess revenue to ensure financial viability and
fulfill its community mission.
Explanation: Unlike for-profit entities that focus on stockholder wealth, not-for-profits
are mission-driven. Their financial goal is to generate a "surplus" (the equivalent of
profit) to reinvest in new technology, facilities, and community benefits, ensuring long-
term sustainability.
2. Which of the following is a key characteristic of a Balance Sheet?
a) It reports revenues and expenses over a period of time.
b) It is based on the fundamental equation: Assets = Liabilities + Net Assets.
c) It details the sources and uses of cash.
d) It shows the number of full-time equivalent employees.
Answer: b) It is based on the fundamental equation: Assets = Liabilities + Net
Assets.
Explanation: The Balance Sheet is a snapshot of the organization's financial position at
a specific point in time. The equation must always balance, showing what the
organization owns (Assets) and how it was financed, either by debt (Liabilities) or by
retained earnings (Net Assets).
, 3. On a hospital's Statement of Operations, "Net Patient Service Revenue" is
calculated as:
a) Gross Patient Service Revenue minus Contractual Allowances.
b) Total Revenue minus Total Expenses.
c) Cash Collections from Patients.
d) Gross Patient Service Revenue plus Other Operating Revenue.
Answer: a) Gross Patient Service Revenue minus Contractual Allowances.
Explanation: Hospitals bill at their "chargemaster" rates (Gross Revenue), but they
rarely receive that full amount. Contractual allowances are the differences between
billed charges and the amounts agreed upon with third-party payers like Medicare and
insurance companies. Net Patient Service Revenue is the amount the hospital actually
expects to be paid.
4. What is the primary purpose of the Statement of Cash Flows?
a) To show the profitability of the organization.
b) To reconcile net income with the change in cash and cash equivalents.
c) To list all the assets and liabilities of the organization.
d) To detail the hospital's community benefit activities.
Answer: b) To reconcile net income with the change in cash and cash
equivalents.
Explanation: The Statement of Cash Flows explains how the organization generated
and used its cash during a period. It breaks down cash activities into Operating,
Investing, and Financing activities, providing insight into liquidity that the income
statement cannot.
Section 2: Cost Analysis & Management
5. The difference between a fixed cost and a variable cost is that a fixed cost:
a) Changes in direct proportion to the volume of services.
b) Remains constant in total, regardless of volume within the relevant range.
, c) Is always related to patient care supplies.
d) Is unavoidable in the short term.
Answer: b) Remains constant in total, regardless of volume within the relevant
range.
Explanation: Fixed costs (e.g., rent, administrative salaries, depreciation) do not
change in total as volume changes. Variable costs (e.g., medical supplies, drugs) do
change in total directly with volume.
6. Cost allocation is the process of:
a) Setting the prices for patient services.
b) Assigning indirect costs from support departments to revenue-producing
departments.
c) Determining the cost of charity care.
d) Calculating employee payroll.
Answer: b) Assigning indirect costs from support departments to revenue-
producing departments.
Explanation: To understand the true cost of patient services, the costs of departments
like Housekeeping, Administration, and Maintenance must be allocated to patient care
departments (e.g., Radiology, Nursing) using a rational basis (e.g., square footage,
labor hours).
7. The technique used to determine the volume needed to cover all costs and
achieve a zero profit is called:
a) Variance Analysis.
b) Cost-Benefit Analysis.
c) CVP (Cost-Volume-Profit) Analysis.
d) Ratio Analysis.
Answer: c) CVP (Cost-Volume-Profit) Analysis.
Section 1: Healthcare Finance Environment & Accounting Fundamentals
1. The primary financial objective for a not-for-profit healthcare organization is
best described as:
a) Maximizing shareholder wealth.
b) Generating sufficient excess revenue to ensure financial viability and fulfill its
community mission.
c) Minimizing the cost of all services provided.
d) Achieving the highest possible patient satisfaction scores.
Answer: b) Generating sufficient excess revenue to ensure financial viability and
fulfill its community mission.
Explanation: Unlike for-profit entities that focus on stockholder wealth, not-for-profits
are mission-driven. Their financial goal is to generate a "surplus" (the equivalent of
profit) to reinvest in new technology, facilities, and community benefits, ensuring long-
term sustainability.
2. Which of the following is a key characteristic of a Balance Sheet?
a) It reports revenues and expenses over a period of time.
b) It is based on the fundamental equation: Assets = Liabilities + Net Assets.
c) It details the sources and uses of cash.
d) It shows the number of full-time equivalent employees.
Answer: b) It is based on the fundamental equation: Assets = Liabilities + Net
Assets.
Explanation: The Balance Sheet is a snapshot of the organization's financial position at
a specific point in time. The equation must always balance, showing what the
organization owns (Assets) and how it was financed, either by debt (Liabilities) or by
retained earnings (Net Assets).
, 3. On a hospital's Statement of Operations, "Net Patient Service Revenue" is
calculated as:
a) Gross Patient Service Revenue minus Contractual Allowances.
b) Total Revenue minus Total Expenses.
c) Cash Collections from Patients.
d) Gross Patient Service Revenue plus Other Operating Revenue.
Answer: a) Gross Patient Service Revenue minus Contractual Allowances.
Explanation: Hospitals bill at their "chargemaster" rates (Gross Revenue), but they
rarely receive that full amount. Contractual allowances are the differences between
billed charges and the amounts agreed upon with third-party payers like Medicare and
insurance companies. Net Patient Service Revenue is the amount the hospital actually
expects to be paid.
4. What is the primary purpose of the Statement of Cash Flows?
a) To show the profitability of the organization.
b) To reconcile net income with the change in cash and cash equivalents.
c) To list all the assets and liabilities of the organization.
d) To detail the hospital's community benefit activities.
Answer: b) To reconcile net income with the change in cash and cash
equivalents.
Explanation: The Statement of Cash Flows explains how the organization generated
and used its cash during a period. It breaks down cash activities into Operating,
Investing, and Financing activities, providing insight into liquidity that the income
statement cannot.
Section 2: Cost Analysis & Management
5. The difference between a fixed cost and a variable cost is that a fixed cost:
a) Changes in direct proportion to the volume of services.
b) Remains constant in total, regardless of volume within the relevant range.
, c) Is always related to patient care supplies.
d) Is unavoidable in the short term.
Answer: b) Remains constant in total, regardless of volume within the relevant
range.
Explanation: Fixed costs (e.g., rent, administrative salaries, depreciation) do not
change in total as volume changes. Variable costs (e.g., medical supplies, drugs) do
change in total directly with volume.
6. Cost allocation is the process of:
a) Setting the prices for patient services.
b) Assigning indirect costs from support departments to revenue-producing
departments.
c) Determining the cost of charity care.
d) Calculating employee payroll.
Answer: b) Assigning indirect costs from support departments to revenue-
producing departments.
Explanation: To understand the true cost of patient services, the costs of departments
like Housekeeping, Administration, and Maintenance must be allocated to patient care
departments (e.g., Radiology, Nursing) using a rational basis (e.g., square footage,
labor hours).
7. The technique used to determine the volume needed to cover all costs and
achieve a zero profit is called:
a) Variance Analysis.
b) Cost-Benefit Analysis.
c) CVP (Cost-Volume-Profit) Analysis.
d) Ratio Analysis.
Answer: c) CVP (Cost-Volume-Profit) Analysis.
