Finance Flashcards

Question

What is straight-line depreciation?

Answer 1

The most common method where the asset's cost is divided evenly over its useful life.

Answer 2

The total depreciation expense recognized for an asset up to a specific point in time. Example: If a new hospital was built for $100 million, and its useful life is estimated to be 20 years, the annual depreciation expense would be: Annual Depreciation Expense = Cost of Asset / Useful Life Annual Depreciation Expense = $100 million / 20 years = $5million After 5 years, the accumulated depreciation would be: Accumulated Depreciation = Annual Depreciation Expense * Number of Years Accumulated Depreciation = $5 million/year * 5 years = $25 million The net book value of the asset after 7 years would be: Net Book Value = Cost of Asset - Accumulated Depreciation Net Book Value = $100 million - ($5 million/year * 7 years) = $65 million $100M - $35M = $65M ## Footnote It's a contra-asset account, meaning it reduces the asset's value on the balance sheet.

Answer 3

The **actual depreciation** you take in any given year is considered an **income statement item.** **Accumulated depreciation** item which is the amount of depreciation that's been taken over the life of the asset is considered a **balance sheet item**. This is subtracted from the PP&E to get to the net assets.

Answer 4

First-In, First-Out; assumes the oldest inventory items are sold first. Impact during inflation: COGS: Lower (older, cheaper costs expensed first) Net Income: Higher (because of lower expenses) Inventory Value: Higher (remaining inventory reflects recent, more expensive purchases) **Used on: Income Statement (COGS) and Balance Sheet (Inventory).**

Answer 5

Last-In, First-Out; assumes the most recently purchased items are sold first. 🔹impacts the: Income Statement Affects COGS: Most recent (often higher) costs are expensed first. Leads to higher COGS, lower net income during inflation. Impacts: Gross Profit, Operating Income, and Net Income. Balance Sheet Affects Ending Inventory: Older (lower) costs remain. Results in lower inventory value, reducing Total Assets and possibly Equity. 🧠 Key Takeaway: LIFO lowers net income and inventory values in inflationary periods — reducing taxable income but also making financials appear less profitable.

Answer 6

Non-physical assets such as patents and trademarks that represent valuable intellectual property. **Impairment** occurs when the asset's carrying value exceeds its recoverable amount. Ex. a flood that destroyed a land - the value decreases when eval is done.

Answer 7

An intangible asset that arises when a company acquires another for a price exceeding the fair market value of its identifiable assets. Goodwill is captured as an asset on the balance sheet which represets the company's outstanding reputation. ## Footnote Goodwill value is determined by the assessment of the accounting firms themselves.

Answer 8

A financial metric measuring how quickly a company pays its suppliers.

Answer 9

Days in AP = **Accounts Payable / (Annual Cost of Goods Sold / 365).** Accounts Payable: This is the total amount of money a company owes to its suppliers for goods or services received but not yet paid for. Annual Cost of Goods Sold (COGS): This is the direct cost of producing goods or services sold. 365: This represents the number of days in a year. By dividing the Accounts Payable by the average daily cost of goods sold, we get the average number of days it takes the company to pay its suppliers. ## Footnote If a hospital has a COGS of $700 million and Accounts Payable of $81 million: Average daily COGS: $700 million / 365 = $1.92 million/day Days in AP: $81 million / $1.92 million/day = 42.24 days

Answer 10

A method that recognizes revenue when earned and expenses when incurred, providing a more accurate financial picture.

Answer 11

It provides a more accurate representation of financial performance by matching revenues with related expenses. ## Footnote Accrual accounting provides a more reliable and comprehensive view of a company's financial health, making it the preferred method for most organizations.

Answer 12

It can delay the recognition of revenue and expenses, leading to a distorted view of financial performance.

Answer 13

An income statement is a financial report that shows a company's revenues and expenses over a specific period, helping us understand the company's profitability.

Answer 14

**Key Components:** - **Revenue:** - **Gross Patient Revenue:** Total charges billed to patients. - **Net Patient Revenue:** Amount expected after insurance discounts. - **Miscellaneous Income:** Non-patient revenue (e.g., investments, rentals). - **Expenses:** - **Salaries and Benefits:** Employee compensation costs. - **Contract Services:** Outsourced service expenses. - **Supplies:** Costs of medical and consumable items. - **Depreciation/Amortization:** Spread cost of long-term assets. - **Interest Expense:** Interest on debt. - **Other Expenses:** Miscellaneous costs. - **Profitability:** - **Operating Income:** Profit from core hospital operations. - **Non-Operating Income:** Income from non-core sources (e.g., investments). - **Income Tax:** Taxes on taxable income. - **Net Income:** Final profit or loss after all deductions.

Answer 15

Answer 16

By analyzing the income statement, we can assess the hospital's financial performance, identify trends, and make informed decisions. For example: * Profitability: Is the hospital generating enough revenue to cover its expenses? * Cost Control: Are expenses being managed effectively? * Revenue Growth: Is the hospital growing its revenue base? * Efficiency: How efficiently is the hospital using its resources?

Answer 17

EBIT stands for Earnings Before Interest and Taxes, measuring a company's operating profitability.

Answer 18

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, providing a broader view of a company's operating performance.

Answer 19

EBITDAR stands for Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent, excluding rent expense for a more accurate picture of operating performance.

Answer 20

The Statement of Cash Flows is a financial statement that provides a snapshot of a company's cash inflows and outflows over a specific period. It complements the Income Statement and Balance Sheet by focusing on the cash movement.

Answer 21

1. Cash Flows from Operations: This section deals with the cash generated or used by the core business operations. 2. Cash Flows from Financing: This involves cash inflows and outflows related to borrowing and repaying loans, issuing or buying back shares, and paying dividends. 3. Cash Flows from Investing: Here, you track cash used for investments in long-term assets like property or equipment, and cash received from the sale of these assets or other investments.

Answer 22

1. Direct Method: This method lists all major operating cash receipts and payments directly. 2. Indirect Method (More Common): This method starts with net income and adjusts it for non-cash items like depreciation and amortization, and changes in working capital (accounts receivable, inventories, and accounts payable).

Answer 23

* Increase in Accounts Receivable (AR): Reduces cash flow because the company has sold goods or services on credit, not for cash. * Increase in Inventory: Also reduces cash flow as cash is tied up in unsold goods. * Increase in Accounts Payable (AP): Increases cash flow as the company has delayed payment, keeping cash longer. Comprehensive Answers to Questions: * What happens to the CFO when inventory increases? Answer: When inventory increases, it means cash has been used to purchase more goods, which decreases cash on hand. However, since these goods haven't been sold yet, this isn't an operational expense. Therefore, in calculating Cash Flow from Operations (CFO), you would add back the cash used for inventory to reflect that this is not an expense but an investment in stock. * What happens when AR increases? Answer: An increase in Accounts Receivable (AR) means that sales have been made on credit, reducing the cash flow. Hence, CFO decreases because the cash from these sales is not immediately available; it's tied up in receivables. * What happens when AP increases? Answer: When Accounts Payable (AP) increases, it indicates that the company has delayed payment to suppliers, which means more cash is retained in the business, thus increasing the CFO. * You promised to pay someone next year for doing something this year, what happens to your CFO? Answer: CFO is not reduced. The cash flow impact occurs when the payment is made, not when the expense is recorded.

Answer 24

CFO decreases because cash has been used to purchase more goods, which are not yet sold. ## Footnote This is not an operational expense but an investment in stock.

Answer 25

1. Income Statement Unique Insight: ➡️ Profitability over a period of time Shows revenues, expenses, and net income (or loss) over a defined period (e.g., quarter, year). Answers: Is the organization making money from operations and other activities? Key Line: Net Income Primary Focus: Revenue vs. Expenses 2. Balance Sheet Unique Insight: ➡️ Financial position at a specific point in time Provides a snapshot of what the organization owns (assets), owes (liabilities), and the residual interest (equity or net assets). Answers: Is the organization solvent and financially stable right now? Key Line: Total Assets = Liabilities + Equity. Primary Focus: Assets, liabilities, equity. 3. Cash Flow Statement Unique Insight: ➡️ Actual cash movement during a period Breaks down cash into operating, investing, and financing activities. Answers: Wherm obligations with actual cash on hand? Key Line: Net Cash from Operating Activities. Primary Focus: Cash inflows & outflows

Answer 26

Net Cash Flow is the total change in cash over a period, reflecting how the year's activities have affected the company's cash position.

Answer 27

The Statement of Cash Flows is a critical tool for healthcare finance professionals to: * Monitor Liquidity: Assess the organization's ability to meet its short-term obligations. * Evaluate Investment Decisions: Assess the impact of capital expenditures on cash flow. * Identify Financing Needs: Determine the need for additional financing to fund growth and operations. * Improve Financial Performance: Identify areas where cash flow can be improved, such as reducing operating expenses or optimizing working capital.

Answer 28

When a company accrues an expense in the current year but pays it in the following year, the expense ** reduces net income on the income statement**, even though no cash is paid in the current year. On the Statement of Cash Flows (Indirect Method), this ** non-cash expense is offset by an increase in accrued liabilities in the Operating Activities section.** This adjustment adds back the change in accrued liabilities to net income, effectively neutralizing the expense’s impact on cash. **As a result, cash flow from operations (CFO) is not reduced in the year the expense is accrued.** In the following year, when the company actually pays the expense, accrued liabilities decrease, resulting in a cash outflow in the operating activities section.

Answer 29

Qualitative analysis focuses on factors that are difficult to quantify, such as notes to financial statements, managerial interviews, and sector analysis.

Answer 30

Quantitative analysis involves using numerical data and statistical techniques to assess a company's financial performance.

Answer 31

Ratio analysis involves calculating ratios to assess various aspects of a company's financial health, including liquidity, solvency, profitability, and efficiency.

Answer 32

To determine if an organization can meet its short-term obligations. Liquidity ratios measure the ability of an organization to pay off its short-term liabilities with its short-term assets. They are crucial for understanding if the organization has enough liquid assets to cover its immediate financial responsibilities. Common Ratios: **Current Ratio:** Current Assets / Current Liabilities **Quick Ratio (Acid-Test Ratio)**: (Current Assets - Inventory) / Current Liabilities

Answer 33

** Current Ratio** Formula: Current Assets/Current Liabilities - Includes: Cash, accounts receivable, inventory, prepaids, short-term investments - Use When: Assessing overall short-term financial health, assuming most assets are liquid Typical Use Case: Routine liquidity monitoring in a stable operating environment 🔹** Quick Ratio (Acid-Test)** Formula: (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities - Excludes: Inventory and prepaid expenses - Use When: Testing immediate solvency under pressure or financial uncertainty Typical Use Case: Evaluating an organization’s ability to meet urgent obligations without asset conversion ## Footnote Solvency is a measure of an organization’s long-term financial stability — specifically, its ability to meet long-term debt obligations and continue operating over time.

Answer 34

To assess if the organization can pay its debt and survive financially. Debt or leverage ratios look at the level of debt an organization has relative to its assets, equity, or earnings. They help in evaluating the financial structure, risk, and long-term solvency of the organization. Common Ratios: Debt to Equity Ratio: Total Debt / Total Equity Debt Ratio: Total Debt / Total Assets Interest Coverage Ratio: EBIT (Earnings Before Interest and Taxes) / Interest Expense

Answer 35

**Debt-to-Equity Ratio = Total Debt/Total Equity** ✅ When to Use: To evaluate the capital structure — how much debt the organization is using relative to equity. Use when comparing how leveraged the organization is compared to peers or industry benchmarks. Important for long-term financial risk assessment. ## Footnote A hospital board is reviewing financing options for a new wing. The CFO presents the Debt-to-Equity Ratio to assess whether the system is becoming too debt-reliant versus using retained earnings or philanthropic capital.

Answer 36

**Debt Ratio = Total Debt/Total Assets** ✅ When to Use: To measure the percentage of total assets financed by debt. Use when you want a snapshot of financial risk — higher ratios indicate greater financial leverage. Useful for lenders or rating agencies assessing default risk. ## Footnote An independent hospital is applying for a line of credit. The bank uses the Debt Ratio to evaluate whether the hospital already has too much of its assets tied to liabilities.

Answer 37

Interest Coverage Ratio = EBIT/Interest Expense ✅ When to Use: To assess the organization’s ability to meet interest payments from operating income. Use when evaluating short-term solvency and the sustainability of debt service. Especially critical during economic downturns or when earnings fluctuate. ## Footnote A healthcare system's finance committee is reviewing whether it can take on a bond issue. They use the Interest Coverage Ratio to ensure it can comfortably cover debt payments from operations — a key factor for investors and credit ratings.

Answer 38

To evaluate how effective management is in managing assets and how well assets are utilized. Operating ratios provide insights into the efficiency of operations, including how well the organization is using its assets to generate revenue. They focus on the operational performance, asset management, and utilization. Common Ratios: Asset Turnover Ratio: Total Revenue / Total Assets Inventory Turnover Ratio: Cost of Goods Sold / Average Inventory Return on Assets (ROA): Net Income / Total Assets ## Footnote Cost of Goods Sold = total operating revenue

Answer 39

The Asset Turnover Ratio measures how efficiently an organization uses its total assets to generate revenue. It shows how many dollars of revenue are generated for each dollar invested in total assets. It’s a critical indicator of operational efficiency and return on asset investment. A hospital with $300 million in net revenue and $150 million in average total assets would have an asset turnover ratio of 2.0, meaning it generates $2 in revenue for every $1 of assets. ## Footnote Asset Turnover Ratio: Total Revenue / Total Assets Net Revenue = Total revenue minus any returns or allowances Average Total Assets = (Beginning Assets + Ending Assets) ÷ 2

Answer 40

**The Return on Assets (ROA) is calculated as Net Income / Average Total Assets.** Net Income: Profit after all expenses, taxes, and interest Average Total Assets: (Beginning Assets + Ending Assets) ÷ 2 Return on Assets (ROA) is a key financial performance metric that measures how efficiently an organization uses its assets to generate profit. It tells you how much net income is produced for every dollar invested in total assets.

Answer 41

To determine if the organization is profitable. Profitability ratios measure the ability of the organization to generate profit from its operations. They provide a snapshot of the financial success in terms of profit margins, return on investments, etc. Common Ratios: 1. Total Margin: (Net Income / total Revenue) x 100. 2. Operating Margin: Operating Income / Operating Revenue x 100 (Operating Income = Revenue - COGS - Operating Expenses) 3. EBITDA Margin: EBITDA/Operating Revenue x 100 EBITDA=Net Income+Interest+Taxes+Depreciation+Amortization Alternative (from operating income): If you already have Operating Income (EBIT): EBITDA = EBIT (Operating Income) + Depreciation + Amortization 4. Return on Assets: Net Income/Total Assets 5. Return on Equity (ROE): Net Income / Shareholder's Equity

Answer 42

This ratio measures the proportion of premium revenue spent on medical claims. A lower ratio indicates more efficient management of healthcare costs relative to premiums collected. Formula: Total Medical Expenses/premium revenue

Answer 43

It assesses the efficiency of an organization in terms of administrative overhead, showing the percentage of operating revenue consumed by administrative expenses. Formula: Total Administrative Expenses/Operating Revenue

Answer 44

Fixed costs are expenses that remain constant regardless of the level of production or service delivery. Examples include rent for a healthcare facility, fixed salaries for administrative staff, insurance premiums, and property taxes.

Answer 45

Variable costs fluctuate directly with the volume of activity in service delivery. Examples include costs of medical supplies, utility expenses, and wages for hourly employees.

Answer 46

Semi-fixed costs have a fixed component and a variable component, remaining fixed within a specific range of activity but increasing as activity exceeds thresholds. Salaries of supervisory staff may remain fixed until a certain level of activity is exceeded, necessitating additional hires.

Answer 47

A sunk cost is a cost that has already been incurred and cannot be recovered.

Answer 48

Average Cost is the total cost of production divided by the number of units produced. Average Cost = Total Cost / Total Units

Answer 49

Total Cost = Fixed Cost + Variable Cost

Answer 50

The amount each unit contributes to fixed costs and profit. Contribution Margin = Price per Unit - Variable Cost per Unit

Answer 51

The point at which total revenue equals total cost. Break-Even Point (Units) = Fixed Costs / Contribution Margin per Unit

Answer 52

Direct costs can be directly traced to a specific product or service, particularly in patient care. Examples include salaries of radiologists, cost of X-ray film, and depreciation of radiology equipment.

Answer 53

Indirect costs are those that cannot be directly traced to a specific product or service and are shared across multiple departments. Examples include salaries of administrative staff, rent for administrative offices, and general administrative costs.

Answer 54

A control unit is a specific department or division within a healthcare organization responsible for a particular function.

Answer 55

A unit within an organization where a manager is accountable for specific costs, revenues, or both.

Answer 56

Cost allocation is the process of assigning costs to specific cost objects, essential for accurate financial reporting.

Answer 57

Issuing debt to finance operations, which can increase return on equity but also financial risk.

Answer 58

Defeasance is a legal and financial process by which an organization eliminates its liability for outstanding debt before maturity, typically by setting aside sufficient funds in a trust to cover all future payments (principal and interest) on the debt. Defeasance allows a borrower (like a hospital) to be released from its bond obligation by placing risk-free securities (like U.S. Treasuries) in an escrow account to cover future debt service. Once defeased, the debt is no longer considered a liability on the borrower’s balance sheet. ## Footnote A nonprofit health system issued $100 million in tax-exempt bonds to fund a new tower. Five years later, it refinances at a lower interest rate. To defease the original bonds, it: Sets aside U.S. Treasuries in a trust The trust pays all future obligations on the original bonds The system removes the debt from its balance sheet — improving leverage ratios

Answer 59

A reimbursement model based on the actual cost of services provided, primarily used for Critical Access Hospitals.

Answer 60

A system with predetermined payment rates based on service classification, common in Medicare reimbursements.

Answer 61

Payments calculated as a percentage of the provider's billed charges, now rarely used due to inflationary concerns.

Answer 62

Per-procedure reimbursement is a fee-for-service (FFS) payment model in which a healthcare provider is paid a fixed amount for each procedure or service performed, regardless of the time, resources, or outcomes involved. ## Footnote A payer reimburses $2,000 per colonoscopy, regardless of whether: It took 30 minutes or 90 minutes The patient had complications Additional follow-up was needed The payment is based solely on the procedure code, not outcomes or quality.

Answer 63

Per-diagnosis reimbursement is a payment model in which a provider is paid a fixed amount based on the patient’s diagnosis, regardless of the actual services rendered or their cost. This model is most commonly implemented through Diagnosis-Related Groups (DRGs) in inpatient hospital settings. A hospital receives a predetermined lump-sum payment for treating a patient with a specific diagnosis (e.g., pneumonia, hip replacement), based on factors like: - Primary diagnosis - Complications or comorbidities - Patient age and discharge status ## Footnote - Used extensively in Medicare Part A inpatient hospital payments - Encourages hospitals to reduce length of stay, resource use, and avoid complications

Answer 64

Per diem reimbursement is a payment model where a fixed daily rate is paid to a healthcare provider for each inpatient day a patient stays, regardless of the specific services provided during that day. ## Footnote Common Settings for Per Diem: - Inpatient hospitals - Skilled nursing facilities (SNFs) - Rehabilitation centers - Psychiatric facilities

Answer 65

Covers all services related to a **treatment episode**, encouraging care coordination among providers.

Answer 66

Providers receive a fixed payment per patient per month to cover all necessary services.

Answer 67

A classification system for inpatient hospital services, grouping patients with similar diagnoses.

Answer 68

The Resource-Based Relative Value Scale (RBRVS) is a system used by Medicare (and many commercial payers) to determine physician reimbursement for services based on the resources required to perform them, rather than on historical charges or market rates. Formula: Payment=(Work RVU+Practice Expense RVU+Malpractice RVU)×Conversion Factor ## Footnote Example: CPT 99213 (office visit, established patient) Total RVU: 2.0 Conversion Factor (2024): $33.89 Medicare payment: 2.0 × $33.89 = $67.78

Answer 69

A standardized coding system for medical, surgical, and diagnostic procedures.

Answer 70

An expansion of CPT codes including additional codes for non-physician services and medical supplies.

Answer 71

Ambulatory Payment Classifications (APCs) are the Medicare outpatient prospective payment system (OPPS) used to determine reimbursement for hospital outpatient services, such as same-day surgeries, emergency department visits, and diagnostic tests. ## Footnote Example: A hospital performs a colonoscopy in an outpatient setting. The procedure is assigned to APC 5313 with a payment rate of $1,200. Regardless of the hospital’s internal costs (e.g., $1,100 or $1,500), Medicare pays $1,200 (plus patient coinsurance).

Answer 72

**APC (Outpatient) | DRG (Inpatient)** Outpatient services || Inpatient admissions Procedure-based bundles || Diagnosis-based bundles Multiple Payments (Yes, || One DRG per stay per service/procedure)

Answer 73

A classification system for skilled nursing facilities based on the intensity of care provided.

Answer 74

A payment model for home health services based on a patient’s clinical and service needs.

Answer 75

A comprehensive list of all services and corresponding prices provided by a healthcare facility.

Answer 76

The process of recording services provided to patients to ensure proper billing.

Answer 77

The ratio of the actual cost of providing a service to the charges billed.

Answer 78

The barcode on the medication is scanned and automatically added to the patient’s bill. ## Footnote A nurse administers two units of a medication and scans their barcodes into the electronic medical record (EMR). This information is automatically transferred to the patient’s bill, ensuring no revenue is lost.

Answer 79

EMRs integrated with RFID/barcode systems provide real-time updates to ensure accurate billing.

Answer 80

Automating charge capture helps prevent missed or incorrect charges.

Answer 81

The ratio of the actual cost of providing a service to the amount charged. RCC helps calculate the actual cost of uncompensated care (e.g., for charity patients) and assess efficiency.

Answer 82

RCC is calculated by dividing the actual cost by the amount charged. ## Footnote Example: A hospital charges $10,000 for a surgery but incurs costs of $7,000. The RCC is 0.7.

Finance Flashcards

(106 cards)