Questions and Answers of Introduction To Accounting

Why might organizations adopt a more complicated allocation system?
What are the key differences between traditional and activity based costing?
How does activity based costing (ABC) differ from traditional costing approaches?
The Housekeeping Services department of Ruger Clinic, a multispecialty practice in Toledo, Ohio, had $100,000 in direct costs during 2004.These costs must be allocated to Ruger’s three
Assume that the hospital uses the direct method for cost allocation.Furthermore, the cost driver for General Administration and Financial Services is patient services revenue, while the cost driver
Assume that the hospital uses salary dollars as the cost driver for General Administration, housekeeping labor hours as the cost driver for Facilities, and patient services revenue as the cost driver
Now, assume that the hospital uses the step-down method for cost allocation, with salary dollars as the cost driver for General Administration, housekeeping labor hours as the cost driver for
Return to the direct method of cost allocation and use the same cost drivers as specified in Problem 6.4 for General Administration and Facilities. However, assume that $2,000,000 of Financial
Consider the following data for a clinical laboratory:a. Using ABC techniques, determine the allocation rate for each activity.b. Now, using this allocation rate, estimate the total cost of
Are healthcare providers generally either price takers or price setters exclusively? Explain your answer.
Briefly explain the process for pricing individual services.
Briefly explain why the base case analysis required the calculation to move up the profit and loss statement rather than down (the normal direction).
Briefly describe the following three methods for developing premium rates:• Fee-for-service approach• Cost approach• Demographic approach
Of the three approaches, which one would be the most accurate? Which approach is the easiest to apply in practice?
It is common to express premium rates as PMPM. Does this mean that all providers will be capitated?
What is a relative value unit (RVU)?
Explain how RVUs can be used to estimate costs and set prices on individual services?
What would you do regarding the contract if you were the CEO of Baptist Memorial Hospital?
a. Using a healthcare provider (e.g., a hospital) to illustrate your answer, explain the difference between a price setter and a price taker.b. Can most providers be classified strictly as a price
The Audiology department at Randall Clinic offers many services to the clinic’s patients. The three most common, along with cost and utilization data, are:a. What is the fee schedule for these
Assume that Valley Forge Hospital has only the following three payer groups:The hospital’s fixed costs are $38 million.a. What is the hospital’s net income?b. Assume that half of the 100,000
Bay Pines Medical Center estimates that a capitated population of 50,000 would have the following base case utilization and total cost characteristics:In addition to medical costs, Bay Pines
Assume that a primary care physician practice performs only physical examinations. However, there are three levels of examination—I, II, and III—that vary in depth and complexity. A RVU analysis
What is the primary difference between Sections 1 and 3 of the financial plan?
What is budgeting?
How does the cash budget differ from the operating budget? From the statement of cash flows?
What are the primary differences between conventional and zero-based budgets?
What are the primary differences between top-down and bottom-up budgets?
What is the difference between a static budget and a flexible budget?
Considering all the information in the operating budget, why do organizations need a cash budget?
Why is planning and budgeting so important to an organization’s success?
a. Explain the relationships among the static budget, flexible budget, and actual budget.b. Assume that a group practice has both capitated and fee-for-service(FFS) patients. Furthermore, the number
Assume Venture Healthcare sold bonds that have a ten-year maturity, a 12 percent coupon rate with annual payments, and a $1,000 par value.a. Suppose that two years after the bonds were issued, the
Pacific Homecare has three bond issues outstanding. All three bonds pay $100 in annual interest plus $1,000 at maturity. Bond S has a maturity of five years, Bond M has a 15-year maturity, and Bond L
Six years ago, Bradford Community Hospital issued 20-year municipal bonds with a 7 percent annual coupon rate. The bonds were called today for a $70 call premium—that is, bondholders received
Regal Health Plans issued a ten-year, 12 percent annual coupon bond a few years ago. The bond now sells for $1,100. The bond has a call provision that allows Regal to call the bond in four years at a
a. What is meant by the term risk/return trade-off ?b. Does this trade-off hold in all markets?
Critique this statement: “The use of debt financing lowers the net income of the firm, and hence debt financing should be used only as a last resort.”
What capital components are typically included when estimating a firm’s corporate cost of capital?
What is the economic interpretation of the corporate cost of capital?
Is the corporate cost of capital the same for all firms? Explain your answer.
For any given firm, can the corporate cost of capital be used as the hurdle rate for all projects under consideration? Explain your answer.
Briefly define the following cash flow estimation concepts.a. Incremental cash flowb. Cash flow versus accounting incomec. Sunk costd. Opportunity coste. Net working capitalf. Strategic value g.
Critique this statement: NPV is a better measure of project profitability than IRR because it leads to better capital investment decisions.
Describe three alternative current asset investment policies. Explain each policy’s risk and return characteristics.
a. What is the difference between permanent assets and temporary assets?b. If a firm uses the maturity matching approach to current asset financing, how will its temporary assets be financed?c.
a. Give two reasons why businesses hold marketable securities.b. Which types of securities are most suitable for holding as marketable securities?c. Suppose Southwest Regional Medical Center has just
a. Define average collection period.b. How is it used to monitor a firm’s accounts receivable?c. What is an aging schedule?d. How is it used to monitor a firm’s accounts receivable?
Explain briefly how businesses can obtain secured short-term financing.
Suppose one of the suppliers to Seattle Health System offers terms of 3/20, net 60.a. When does the system have to pay its bills from this supplier?b. What is the approximate cost of the costly trade
Langley Clinics, Inc., buys $400,000 in medical supplies each year(at gross prices) from its major supplier, Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is
Milwaukee Surgical Supplies, Inc., sells on terms of 3/10, net 30.Gross sales for the year are $1,200,000 and the collections department estimates that 30 percent of the customers pay on the tenth
Fargo Memorial Hospital has annual net patient service revenues of $14,400,000. It has two major third-party payers, plus some of its patients are self-payers. The hospital’s patient accounts
One asset management ratio, the inventory turnover ratio, is defined as sales (i.e., revenues) divided by inventories. Why would this ratio be more important for a medical device manufacturer or a
a. Assume that Beverly Enterprises and Manor Care, two operators of nursing homes, have fiscal years that end at different times—say, one in June and one in December. Would this fact cause any
a. What is the difference between trend analysis and comparative analysis?b. Which one is more important?
What is EVA, and what does it measure?
Distinguish between operating and financial leases. Would you be more likely to use an operating lease to finance a piece of diagnostic equipment or a hospital building?
Leasing companies often promote the following two benefits of leasing.Critique the merits of each hypothesized benefit.a. Leasing preserves a business’s liquidity because it avoids the large cash
Assume that there were no IRS restrictions on what type of transaction could qualify as a lease for tax purposes. Explain why some restrictions should be imposed.
In the Nashville Radiology Group example given in the chapter, we assumed that the lease did not have a cancellation clause. What effect would a cancellation clause have on the analysis?
Discuss some of the asymmetries that drive lease transactions.
Describe the mechanics of the discounted cash flow (DCF) approach to business valuation.
Describe the mechanics of the market multiple approach to business valuation.
Which approach do you think is best for valuing a business: the DCF approach or the market multiple approach? Explain the rationale behind your answer.
a. What is a cost pool?b. What is a cost driver?c. How is the cost allocation rate determined?
Effective cost drivers, and hence the resulting allocation system, must have what two important attributes?
How does activity-based costing (ABC) differ from traditional costing approaches?
The Housekeeping Services department of Ruger Clinic, a multispecialty practice in Toledo, Ohio, had $100,000 in direct costs during 2007.These costs must be allocated to Ruger’s three
Refer to Problem 6.1. Assume that the three patient services departments are Adult Services, Pediatric Services, and Other Services. The patient services revenue and hours of housekeeping services
Assume that the hospital uses the direct method for cost allocation.Furthermore, the cost driver for General Administration and Financial Services is patient services revenue, while the cost driver
Assume that the hospital uses salary dollars as the cost driver for General Administration, housekeeping labor hours as the cost driver for Facilities, and patient services revenue as the cost driver
Now assume that the hospital uses the step-down method for cost allocation, with salary dollars as the cost driver for General Administration, housekeeping labor hours as the cost driver for
Return to the direct method of cost allocation and use the same cost drivers as specified in Problem 6.4 for General Administration and Facilities. However, assume that $2,000,000 of Financial
Consider the following data for a clinical laboratory:a. Using ABC techniques, determine the allocation rate for each activity.b. Now, using this allocation rate, estimate the total cost of
a. Using a healthcare provider (e.g., a hospital) to illustrate your answer, explain the difference between a price setter and a price taker.b. Can most providers be classified strictly as either a
Explain the essential differences between full cost and marginal cost pricing strategies.
What is the role of information systems in pricing decisions?
Compare and contrast the following three methods for developing capitation rates: fee-for-service approach, cost approach, and demographic approach.
a. What is scenario analysis as applied to pricing and service decisions?b. Why is it such an important part of the process?
a. Define a relative value unit (RVU).b. Explain how RVUs can be used to set prices on individual services.
The Audiology department at Randall Clinic offers many services to the clinic’s patients. The three most common, along with cost and utilization data, are:a. What is the fee schedule for these
Assume that Valley Forge Hospital has only the following three payer groups:The hospital’s fixed costs are $38 million.a. What is the hospital’s net income?b. Assume that half of the 100,000
Bay Pines Medical Center estimates that a capitated population of 50,000 would have the following base case utilization and total cost characteristics:In addition to medical costs, Bay Pines
If you were the CEO of Bayside Memorial Hospital, would you advocate a top-down or bottom-up approach to budgeting? Explain your rationale.
a. Explain the relationships among the static budget, flexible budget, and actual results.b. Assume that a group practice has both capitated and fee-for-service(FFS) patients. Furthermore, the number
Here are the 2007 revenues for the Wendover Group Practice Association for four different budgets, in thousands of dollars:a. What does the budget data tell you about the nature of Wendover’s
Here are the budgets of Brandon Surgery Center for the most recent historical quarter, in thousands of dollars:The center assumes that all revenues and costs are variable and hence tied directly to
Refer to Carroll Clinic’s 2007 operating budget contained in Table 8.3.Instead of the actual results reported in Table 8.4, assume the results reported below:a. Construct Carroll’s flexible
Great Lakes Health Network’s net income increased from $3.2 million in 1997 to $6.4 million in 2007. The total growth rate over the ten years is 100 percent, while the annual growth rate is only
Would you rather have a savings account that pays 5 percent compounded semiannually or one that pays 5 percent compounded daily? Explain your answer.
Explain the concept of return on investment (ROI) and the two different approaches to measuring ROI.
Stock A has an expected rate of return of 8 percent, a standard deviation of 20 percent, and a market beta of 0.5. Stock B has an expected rate of return of 12 percent, a standard deviation of 15
Explain the difference between portfolio risk and diversifiable risk.
The four fundamental factors that affect the supply of and demand for investment capital, and hence interest rates, are productive opportunities, time preferences for consumption, risk, and
a. What is a yield curve?b. Is the yield curve static, or does it change over time?c. What is the difference between a normal yield curve and an inverted yield curve?d. What impact does the yield
Briefly describe the following types of debt:a. Term loanb. Bondc. Mortgage bondd. Senior debt; junior debte. Debenturef. Subordinated debenture g. Municipal bond
a. • What are the three primary bond rating agencies?• What do bond ratings measure?• How do investors interpret bond ratings?• What is the difference between an A-rated bond and a B-rated
What is credit enhancement?
What three factors primarily influence the general level of interest rates?

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