Accounting Fundamentals

for Health Care Management, Steven A. Finkler, PhD, CPA, 3rd edition.

Chapter 18 Case StudyHappy Hospital -

Test Your Knowledge

1. The Hospital for Healthy Living (HHL) financial statements are in the Excel file

named "CH18_Financials_Templates" at this book's companion website. During

fiscal year 2019, HHL decides to outsource its information technology services to

another company. By outsourcing, HHL will be able to get rid of certain services

and staff that cost the hospital $175,000 annually. There is an upfront cost to

undertaking this venture, because the company must set up servers, backup

systems, and e-mail accounts for HHL. Then, there are annual contract payments

that HHL must make with the IT company. The board of directors has agreed to a

4-year contract. Management is entertaining bids from two companies. The first

requires a $250,000 payment for the initial conversion and $100,000 per year

thereafter. The other bid requires a $350,000 payment up front but only $75,000

annually. HHL has a 6% cost of capital. Which option should HHL choose?

2. The following transactions occurred during the year. Record these transactions.

a. HHL took out a long-term loan for $3 million.

b. HHL purchased $1 million in inventory with cash.

c. HHL purchased equipment that cost $150,000 on account. The equipment is

expected to last 15 years and has no salvage value.

d. $540,865,000 (net of allowances and charity care) was billed for patient

services. The hospital estimates that 5% of these bills will be bad debt.

e. $875,000 of inventory was used.

f. Donations of $400,000 were received in cash.

g. HHL pays in cash for a 2-year malpractice insurance premium at a cost of $5

million. One-half of the premium is for next year, and the other is for the

following year.

h. HHL pays $12,560,000 in accounts payable.

i. HHL workers earned $259 million in wages for the year. The hospital paid out

$282 million in cash. It also paid out $60 million in benefits, all in cash.

j. The equipment purchased in transaction c was paid for in cash.

k. $370,500,000 from bills sent to patients was received in cash.

l. HHL collected $25 million in outstanding patient bills in cash.

m. The board is concerned that too much debt outstanding is bad for the

organization. The board chooses to accelerate their debt payments for the year.

HHL paid out $51 million in long-term debt principal and $3 million of interest in

cash.

n. Depreciation for the year was recorded$23 million for existing fixed assets.

Also, calculate the new depreciation necessary for the new equipment

purchased this year, assuming straight-line depreciation.

o. The contract with the IT company chosen is signed. The initial contract cost is

paid, as well as the first year payment.

3. Using these transactions, create financial statements for HHL for 2019.

4. Calculate ratios for HHL to assess its financial strengths and weaknesses.