Deck 16: Accounting for Health Care Organizations

Question 1

Patient service revenues and related receivables exclude charges for charity care services.

Answer 1

True
Explanation: FASB standards and the AICPA Audit and Accounting Guide Health Care Entities specifically requires that charity care services not be included in patient service revenues and related receivables because there is no intention to collect.

Question 2

A contractual adjustment is recorded as a contra-revenue account.

Answer 2

True
Explanation: A contractual adjustment reduces the amount of revenue the health care entity will realize from services provided; therefore, it is recorded as a contra account that will be netted against gross revenues for reporting purposes.

Question 3

An expense for diabetes research that was financed by temporarily restricted contributions would be recorded as a decrease of unrestricted net assets by a not-for-profit health care organization.

Answer 3

True
Explanation: All expenses of nongovernmental, not-for-profit organizations, including health care organizations, are reported, as decreases in unrestricted net assets.

Question 4

Under the FASB GAAP hierarchy the AICPA Audit and Accounting Guide Health Care Entities would be category (b)authoritative guidance.

Question 5

Contingencies that are unique to health care providers arise from malpractice claims,risk contracting,and payor payment programs,obligations to provide uncompensated care,and contractual agreements with physicians.

Question 6

The purpose of a performance indicator is to provide an operating measure for not-for-profit health care organizations that is equivalent to income from continuing operations of for-profit health care organizations.

Question 7

In accounting for health care entities,the provision for bad debt should always be recorded as a revenue deduction,rather than as an expense.

Question 8

Financial reporting standards for all hospitals are established by the FASB.

Question 9

Health care organizations often collaborate and combine with related entities in providing health care services.

Question 10

The goal of financial and operational analysis of a health care entity is to determine if the entity is profitable.

Question 11

Similar to other not-for-profit entities,health care entities are required under FASB standards to report program and support functional expenses.

Question 12

Continuing care retirement communities (CCRC)provide residential care in a facility,along with some level of long-term medical care that is less intensive than hospital care.

Question 13

A nongovernmental not-for-profit health care entity would report the net asset categories unrestricted,restricted and permanently restricted.

Question 14

Health care is provided by organizations that may be for-profit,not-for-profit,or governmental; although roughly half of all health care is provided by not-for-profit entities.

Question 15

FASB standards require that not-for-profit health care entities prepare a statement of changes in net assets.

Question 16

Assets set aside by the governing board for the eventual construction of a hospital addition should be recorded as "assets limited as to use."

Question 17

Similar to for-profit entities,under FASB standards,not-for-profit health care entities are required to classify investments into trading,available-for-sale and held to maturity for reporting purposes.

Question 18

Under GAAP,both governmental and nongovernmental not-for-profit health care entities are required to identify operating and nonoperating activities on their operating statements.

Question 19

The "equity" section (assets minus liabilities)of a health care entity's balance sheet or statement of net position will indicate whether the health care organization is for-profit,not-for-profit,or governmental.

Question 20

All health care organizations report investments at fair value and report unrealized gains or losses on the statement of operations.

Question 21

Which of the following is not a financial statement prepared by nongovernmental not-for-profit health care entities?

A) Statement of changes in net assets.
B) Statement of revenues,expenses,and changes in net assets.
C) Balance sheet.
D) Statement of cash flows.

Question 22

Which of the following volunteer service is most likely to be reported by a private hospital as contribution revenue and an expense?

A) Community members who plant flowers on the grounds once a year in the spring.
B) Volunteers in the gift shop who work a few hours a day serving customers.
C) Nurses from a religious organization who volunteer to assist in the care of critically ill children.
D) An accountant who is a member of the board of directors.

Question 23

Which of the following would usually be considered as temporarily restricted net assets in a nongovernmental not-for-profit hospital?

A) Investment income.
B) Donated services by senior citizens.
C) A permanent endowment received from the city's leading citizen.
D) A research grant from the federal government to study high blood pressure.

Question 24

According to FASB standards,which of the following entities would not be considered a health care organization?

A) The Heart Research Institute.
B) The St.George Hospital.
C) The Family Practice Medical Clinic.
D) The Northeast Health Maintenance Organization.

Question 25

Where would a capitation fee be reported on a health care entity's financial statements?

A) Patient service revenue.
B) Other professional expense.
C) Other revenue.
D) Short-term liability.

Question 26

Contractual adjustments are properly characterized as

A) An expense.
B) Another financing use.
C) A liability.
D) A contra revenue.

Question 27

An annual contributor to a not-for-profit hospital made an unrestricted pledge in October 2013 that will be paid in March 2014.Assuming the hospital's fiscal year-end is December 31,2013,the pledge in October 2013 should be credited to:

A) Contributions-Temporarily Restricted in 2013.
B) Contributions-Unrestricted in 2013.
C) Contributions-Temporarily Restricted in 2014.
D) Contributions-Unrestricted in equal amounts in 2013 and 2014.

Question 28

The statement of activities required by FASB standards for not-for-profit health care entities must display changes for the period in which of the following categories of net assets?

A) Unrestricted,temporarily restricted,and net investment in capital assets.
B) Unrestricted,temporarily restricted,and permanently restricted.
C) Unrestricted,restricted,and invested in capital assets.
D) Spendable net assets and nonspendable net assets.

Question 29

Donated medicines that normally would be purchased by a hospital should be recorded at fair market value and should be credited to

A) Net Patient Service Revenue.
B) Other Revenue.
C) Nonoperating Gains.
D) Deferred Revenues.

Question 30

How would the cash acquisition of equipment be reported on a health care entity's statement of cash flows?

A) Investing activity applying GASB standards.
B) Investing activity applying FASB standards.
C) Financing activity applying FASB standards.
D) Operating activity applying GASB standards.

Question 31

Where does a nongovernmental not-for-profit health care entity report increases that have occurred in its temporarily restricted net assets?

A) Statement of changes in net assets.
B) Statement of operations.
C) Balance sheet.
D) Similar to governmental health care entities,it would not be required to show the increases on the statement.

Question 32

Which of the following would be considered an asset limited as to use?

A) Cash donated for an endowment.
B) Cash from a federal research grant,which is to be used for water quality research.
C) Cash the board of directors has designated for equipment acquisitions.
D) Cash contributions that are to be used for the building fund.

Question 33

Which of the following statements is true about diagnosis-related groups (DRGs)?

A) DRGs are the basis for a cost accounting method that groups costs together by departments performing the services.
B) A DRG is a case-mix classification scheme that is used to determine the payment provided to the hospital for inpatient services,regardless of how much the hospital spends to treat a patient.
C) The federal Medicare system of retroactive payment for services depends on DRGs.
D) The DRGs method is the prevailing practice of billing third-party payors for a health care organization's average cost for providing care for locally defined similar medical conditions.

Question 34

Charity service and bad debts in a public hospital that follows business-type accounting are

A) Both reported as deductions from gross patient revenue in arriving at net patient revenue.
B) Both reported as expenses.
C) Reported differently,with charity service disclosed in the notes to the financial statements and bad debts reported as a deduction from revenue.
D) Reported differently,with charity service reported as a deduction from gross patient revenue and bad debts reported as an expense.

Question 35

Which of the following is (are)considered an authoritative source of GAAP for nongovernmental not-for-profit health care entities?

A) The AICPA Audit and Accounting Guide Health Care Entities.
B) The Healthcare Financial Management Associations' Financial Accounting and Reporting Manual.
C) The FASB Accounting Standards Codification (ASC).
D) All of the above are considered GAAP according to the GAAP hierarchy.

Question 36

Which of the following could be included in the performance indicator measure provided by a nongovernmental not-for-profit hospital?

A) Contribution to an endowment.
B) Gain on sale of equipment.
C) Grant restricted for diabetes research.
D) Interest income that is temporarily restricted.

Question 37

Independent health care organizations that associate for the specific purpose of obtaining financing are called a(an)

A) Consolidation.
B) Obligated group.
C) Affiliation.
D) Joint venture.

Question 38

A hospital originally recorded all patient services it provided as a $500,000 debit to accounts receivable.Upon review the hospital determined that a contractual adjustment of $200,000 needs to be made,and estimated bad debts of $5,000 need to be recorded.In addition,the hospital did not consider $100,000 of charity services provided.Based on the information provided,what is the net amount of accounts receivable that the hospital would report on its financial statements?

A) $495,000.
B) $300,000.
C) $200,000.
D) $195,000.

Question 39

Contractual adjustments that arise from differences between the gross charge for patient services and the amount paid by a third party payor are reported as

A) Deductions from gross patient revenue in arriving at net patient revenue.
B) Disclosures in the notes to the financial statements.
C) Either deductions from gross patient revenue or disclosure in the notes,depending on the dollar amount of the adjustments relative to billings.
D) Bad debt expense.

Question 40

The primary source of revenue for most hospitals is

A) Nonexchange transactions,such as contributions.
B) Exchange transactions,such as fees for services.
C) Investment income.
D) Capitation fees from health maintenance organizations.

Question 41

Explain how one can evaluate both the financial performance of a hospital and the quality of health care the hospital provides.

Question 42

Show entries in general journal form for the following transactions of Bothwell Regional Hospital,a nongovernmental not-for-profit hospital.
1)For the month just ended the hospital received in cash $8,000 from the hospital's gift shop sales,and received donated medicines with a fair value of $47,000.These medicines are of the type the hospital normally would purchase.
2)The hospital's finance officer,in compliance with the directive of the governing board,invested $600,000 of operating cash in certificates of deposit to be held for future purchases of equipment.
3)New equipment costing $750,000 was purchased from money given to the hospital in a prior year to be held until needed for equipment purchases.
4)A federal grant was received in cash in the amount of $400,000 to be used for heart research.During the current year only $50,000 was spent for this research program.

Question 43

Record in general journal form the following selected transactions for Avalon General Hospital,a nongovernmental not-for-profit institution.
1)Gross charges for patient services rendered during the period amounted to $7,870,000,of which $350,000 represented charity care for indigent patients.
2)During the year the provision for bad debts was set at $190,000 and contractual adjustments amounted to $435,000.
3)A wealthy donor donated $2,000,000 to construct a new cardiology wing in the hospital.
4)During the year,the new cardiology wing (see item 3)was one-half completed at a cost of $1,000,000.

Question 44

There are three main reasons why a nongovernmental not-for-profit hospital does not receive the full amount that it normally charges for a room: 1)contractual adjustments arising from transactions with third-party payors,2)charity service provided to indigent patients,and 3)bad debts.Compare the accounting treatment for the three reasons listed.

Question 45

Which of the following would be an appropriate performance indicator for a not-for-profit health care organization?

A) Revenues.
B) Excess of revenues and gains over expenses and losses.
C) Expenses and losses.
D) Contributions to long-lived assets.

Question 46

What auditing issues are of particular significance to the health care industry?

Question 47

Georgetown Hospital,a governmental hospital,recorded during its fiscal year ended September 30,gross patient services valued at $15,000,000,excluding charity care services of $1,600,000.However,contractual adjustments by third-party payors amounted to $1,200,000.In May of that year it received donated medical supplies worth $2,000; supplies it had planned to purchase had it not been for the gift.At year-end,the governing board set aside investments in the amount of $500,000 for future plant expansion and $250,000 to be invested with the related earnings used for a special prenatal care program.
1)In its operating statement for the year ended September 30,how much should Georgetown report as net patient services revenue?
2)For the year ended September 30,how should the donation of medical supplies should be reported?
3)What amount of unrestricted net position should Georgetown report in its balance sheet as board designated,assuming it had no board designated net position at the beginning of the year?

Question 48

"The goal of financial and operational analysis for the manager is to determine the creditworthiness of the health care organization." Do you agree with the statement? Why or why not?

Question 49

Congress mandated diagnosis-related groups (DRGs)as a method for recording costs in health care organizations,in part to facilitate Medicare's prospective payment system.Explain what the DRG system is and describe the impact this change may have had on the cost accounting systems of health care organizations.

Question 50

Under GASB and FASB standards health care entities would apply the same criteria for recognizing and reporting donated services.

Question 51

Contrast the statement of cash flows that nongovernmental not-for-profit hospitals prepare to those that governmental hospitals prepare.

Question 52

Describe what prepaid health care plans are and some of the related accounting issues.