FACHE - HC Finance exam questions with 100% correct answers

Definition and Rule of Inurement - Diversion of funds to persons in governance or mgt as a result of their position of trust - Directors, officers, trustees are prohibited from engaging in business that allows them to derive financial advantage from their governing board role (conflict of interest) What is a best practice (as far as how soon in days) in receiving payments from date of invoice? Less than 50 days Definition of working capital Amount of cash required to support operations - for the period of delay in collecting revenue. 5 Financial Mgt functions that are essential for survival 1) Financial planning 2) Pricing 3) Mgt of long term capital 4) Mgt of short term assets & liabilities 5) Multiple corporate acct Relation of Finance to the Governing Board The finance system relates directly to the gov'n board through the finance committee, and the CFO often represents the Sr. Mgt team on the committee. What 4 budgets comprise a financial budget? 1) Income & expense budget 2) Budgeted financial statements 3) Cash flow budget 4) Capital & new program budget Definition of Financial Budget Expectation of future financial performance What does Activity-Based Costing (ABC) promote? Control of services, the use of make or buy (in-source or out-source) decisions, and improvement of processes that cross several accountability centers. Definition of Capital (capital goods) Human-made resources (machinery & equipment) used to produce goods & services that do not directly satisfy human wants. General Definition of Capital Expenditure Purchases of Land, Buildings, & Equipment for operations, are not for resale, and have a useful life of >1yr, cost of $500 or more, and are subject to depreciation. 6 General Conditions required to be a Capital Expenditure 1) Expenditure of Land, Buildings, & Equipment (Capital Goods) 2) Used for operations, 3) are not for resale, 4) have a useful life of >1yr, 5) cost of $500 or more, 6) are subject to depreciation. What is Section 501(c)(3)? Section of the IRS Code that makes a HCO tax-exempt What are 2 Ratios that measure the ability to pay current liabilities? 1) Current Ratio 2) Acid Test (aka Quick) Ratio What are 3 Ratios used to measure ability to sell inventory and collect receivables? 1) Inventory Turnover ratio 2) A/R Turnover ratio 3) Day's Sales in Receivables ratio What are 2 Ratios used to measure ability to pay long-term debt? 1) Debt Ratio 2) Time-Interest-Earned Ratio What are 4 Ratios used to measure Profitability? 1) Rate of Return on Net Sales ratio 2) Rate of Return on Total Assets ratio 3) Rate of Return on Common Stockholder's Equity ratio 4) Earnings Per Share of Common Stock ratio What are 3 Ratios to analyze Stock as an investment? 1) Price-Earning's ratio 2) Divident Yield ratio 3) Book value per share of common stock What is the Current Ratio Formula? = (Current Assets) / (Current Liabilities) > Measures ability to pay current liabilities from current assets > The higher the ratio, the better; (want numerator to be larger than the denominator, indicates stronger financial position) What is the Acid Test (aka Quick) Ratio Formula? = (Cash+Short-term investments+Net current receivables) / Current Liabilities > Shows ability to pay current liabilities from the most liquid assets > Tells whether the organization can pay all its current liabilities if they come due asap > In other words, how quickly can a HCO convert its most liquid assets to cash to pay current liabilities > The higher the better; indicates enough (if not more) current assets to cover current liabilities What is the Inventory Turnover Formula? = (Cost of Good Sold) / Avg Inventory (at cost) for the Period > Indicates saleability of inventory > Measures the # of times a company sells its avg level of inventory in a given period. > The higher the ratio, the better; means relative ease in selling inventory (want the numerator to be larger than the denominator) What is the A/R Turnover ratio formula? = (Net Credit Sales) / Avg Net A-R > Measures collectibility of receivables; ability to collect cash from credit customers What is the Day's Sales in Receivables ratio Formula? = (Avg Net A-R) / (One day's sales) > Shows how many days it takes to collect avg receivables What is the Debt Ratio Formula? = (Total Liabilities) / (Total Assets) > Indicates % of assets financed through borrowing What is the Time-Interest-Earned Ratio Formula? = (Income from Operations) / (Interest Expense) > Measures coverage of interest expense by operating income What is the Rate of Return on Net Sales ratio Formula? = (Net Income) / (Net Sales) > Shows % of each sales dollar earned as net income What is the Rate of Return on Total Assets ratio Formula? = (Net Income+Interest Expense) / (Avg Total Assets) > Gauges how profitably assets are used > Net Income (for Investors) & Interest Expense (for HCO's Creditors) are the two Return-on-Assets measures. What is the Rate of Return on Common Stockholder's Equity ratio Formula? = (Net Income - Preferred dividends) / (Avg Common Stockholder's Equity) > Gauges how profitably the assets financed by the common stockholders are used. What is the Earnings Per Share of Common Stock ratio Formula? = (Net Income - Preferred Dividends) / (# of shares of common stock outstanding) > Gives the amt of earnings per one share of common stock. What is the Price-Earning's ratio Formula? = (Mkt price per share of common stock) / Earnings per share > Indicates the mkt price of $1 of earnings What is the Operating Cycle of a Merchandiser? Cash --> Inventory --> Receivables --> Cash Definition of Controllership Activities Handles all the functions related to: - Recording costs & revenues - Analyzing costs & revenues Definition of Financial Mgt Activities The mgt of the HCO's capital Definition of Auditing Ensures accuracy of info & protection of assets HCO financial & acct activites are organized under what 3 Activities? 1) Controllership - Recording & Analyzing costs & revenues 2) Financial Mgt - The mgt of the HCO's capital 3) Auditing - Ensures accuracy of info & protection of assets What are the 3 Financial Disciplines? 1) Financial Acct 2) Managerial Acct 3) Financial Mgt What is the focus of Fin Mgt and also its emphasis? Focuses on Asset Mgt with an emphasis of Cash Flow Analysis What are 2 types of Transaction Acct? 1) Revenue Transactions 2) Expense Transactions Definition of Managerial Acct - Focuses on the internal uses of acct information for Decision Making - Cost identification and cost/volume models What type of Acct is the opposite of Fin Acct, & why is it the opposite? Managerial Acct: - B/c it is oriented to producing info for internal organization uses (allows for mgt decision making) - B/c it focuses on every accountable unit - B/c Fin Acct looks at the HCO as a whole in terms of the value of its assets, equity to the owners, and changes in value occuring in each acct period. What are 3 concepts of a General Ledger 1) Internal expense transactions 2) Entries assign capital costs through depreciation of Long-term assets, adjusts inventory values, and allocates expenses of central services 3) Tends to deal w/ resources that lasts Longer Than one budget or financial cyle What is a DRG (Diagnostic Related Group)? It is how Inpatient Care is "bundled" or priced as a package: - Includes all types of care (ex. Lab, Rx, etc) associated by the code Definition of Fin Acct - Basic acct functions of data entry (transaction acct) - Preparation & interpretation of financial statements for internal mgrs and external stakeholders - Records & controls resources & revenues Who are Stakeholders to Fin Acct? - Owners, creditors and Public (external) Definition of Expense Transactions Transactions that Acquire Resources such as personnel, supplies, and equipment Definition of Revenue Transactions - Transactions that provide Elements of Care to patients or other Services such as meals to families - Records virtually all HCO routine cash acquisition, except for gifts, loans, and sales of assets What is a Patient Ledger? - A detailed record of the individual services or supplies rendered to each patient. - It is a financial reflection of the electronic medical record. What is the concept of Time Value of Money? Money earns income over time - In other words, the fact that we can earn income by investing money for a period of time If you invest $700 today to receive $1,000 in three years: a) What is the interest revenue over the 3yrs? b) How does the issuing company see the transaction? c) Knowing the Defn of Present Value, what is the PV in this example? a) $300 b) The issuing company paid $300 interest for the use of your $700 for the 3yr period. c) $700 Definition of Present Value - Is it always less or greater than the future amount? - The amount a person would invest at the present time to receive a greater amount at a future date. - Always less than future amount What is the basic problem when controlling costs associated w/ A/R? Controlling the time or the length of the A/R payment cycle Name one Financial Ratio that monitors A/R Days in A/R = (Net Pt A/R) / (Net Pt service Revenue/365) What are 3 objectives associated w/ A/R Mgt? 1) Minimize lost charges 2) Minimize write-offs for uncollectible accts 3) Minimize the A/R collection cycle List 3 costs associated with granting A/R (credit) 1) Carrying Costs 2) Routine Collection & Credit costs 3) Delinquency Costs Definition of Carrying Cost related to A/R The opportunity cost equal to the return that could have been obtained if the funds invested in A/R were invested in some other manner. Definition of Routine Collection & Credit Costs Operating expenses arising from extending credit. - Fixed cost of having a credits and collection dept. Definition of Delinquency Cost Costs that arise due to the uncertainties inherent in the credit screening and granting process. What is the Concept of Capital Rationing? Why might a firm do this? Limiting an HCO's new investments by setting a cap on parts of the capital budget or by using a higher cost of capital. - An HCO may do this b/c of poor ROI in recent investments or when an HCO can't find the necessary financing for its positive NPV projects