Deck 16: Accounting for Health Care Organizations

Question 1

In accordance with the FASB Codification, an expense for diabetes research that was financed by restricted contributions would be recorded as a decrease in net assets without donor restrictions by a not-for-profit health care organization.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

The GASB and the FASB provide the same criteria for recognizing and reporting services donated to a health care entity.

Question 7

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

Question 8

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

Question 9

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 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

In accounting for health care entities, the account Provision for Bad Debts should be reported as a contra-revenue, rather than as an expense.

Question 17

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

Question 18

Unlike other not-for-profit entities, the FASB requires health care entities to prepare a statement of changes in net assets.

Question 19

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

Question 20

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 21

Charity service and bad debts in a government 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 22

Both the FASB and the GASB would require that a contribution received for the construction of a future medical facility be reported as an investing activity on the statement of cash flows.

Question 23

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 24

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, at the time the receivable was recorded the hospital did not realize $100,000 should be considered charity services. 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 25

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 26

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 designated for equipment acquisitions by the board of directors.
D) Cash contributions that are to be used for the building fund.

Question 27

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 options given are considered GAAP according to the GAAP hierarchy.

Question 28

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 29

Which of the following volunteer services is most likely to be reported by a nongovernmental not-for-profit 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 30

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 31

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 32

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

A) Statement of changes in net assets.
B) Statement of operations.
C) Balance sheet.
D) Similar to governmental health care entities, it would not report the change on the face of a financial statement.

Question 33

In accordance with the FASB Codification estimated uncollectible account amounts are reported in the same manner for patient accounts receivable and donor pledges receivable.

Question 34

When assessing the financial condition of a health care entity, the average age of plant measure assists with assessing the short-term need for capital resources.

Question 35

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

A) Funds designated by the board of directors for future equipment purchases.
B) Donated services by senior citizens.
C) A permanent endowment received from the city's leading citizen.
D) Sales from the hospital gift shop.

Question 36

When assessing the financial condition of a health care entity, the excess margin percentage includes only income from operating activities.

Question 37

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 donor restricted.

Question 38

The format for a not-for-profit health care entity's statement of operations is the same as that for other types of not-for-profits; the FASB requires a different title on the statement since most revenues are derived from user charges.

Question 39

Assets limited as to use are assets without donor restrictions whose use is limited by parties other than donors or grantors.

Question 40

In accordance with the FASB Codification, net assets released from restriction should be included as part of the performance indicator on a health care entity's statement of operations.

Question 41

Which of the following statements concerning the Patient Protection and Affordable Care Act (also known as the Affordable Care Act) is True?

A) Since the Act primarily focuses on the insurance industry there is little impact on health care accounting.
B) Since the Act is a federal law it only affects governmental health care facilities.
C) The Act has impacted delivery of services, as well as the cost and compensation of services.
D) The Act had no impact on a nongovernmental hospital's Internal Revenue Service filing of the Form 990, since the Act is not under the oversight of the Internal Revenue Service.

Question 42

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

Question 43

Financial and operational analysis of health care entities is useful to which of the following decision makers?

A) Managers directly accountable for performance.
B) Analysts determining the credit worthiness of the organization's debt.
C) Third parties determining the appropriate payment based on costs.
D) All of these decision makers find financial and operational analysis of health care entities useful.

Question 44

When evaluating the financial condition of health care entities, the cushion ratio provides:

A) A measure of the capital structure of the organization.
B) A measure of how efficiently an organization pays its bills.
C) A measure of the efficiency of the collections function.
D) An indicator of the profitability of the organization.

Question 45

Congress mandated diagnosis-related groups (DRG) 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 46

For each of the following definitions, indicate the key term from the list that best matches by placing the appropriate definition.
A. Contractual adjustments
B. Capitation fees
C. Charity care
D. Diagnosis-related groups
E. Prospective payment system
F. Health maintenance organizations
G. Performance indicator
H. Third-party payor
________ 1. A prepaid health care plan that functions as a broker of health care between the
consumer/patient requiring services and the health care provider
________ 2. Medicare's system in which payments are based on allowed service costs within the
same diagnosis-related group rather than on actual cost of services rendered
________ 3. Fixed dollar amount of fees per person paid periodically by a third-party payor to a
health care provider
________ 4. The difference between the gross patient service revenue and the negotiated payment by
third-party payors in arriving at net patient service revenue
________ 5. Health services provided to persons with a demonstrated inability to pay

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 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 GASB requires business-type health care organizations to prepare which of the following financial statements?

A) Statement of revenues, expenses, and changes in net position; statement of net position; and statement of cash flows.
B) Statement of operations; statement of net assets; and a statement of cash flows.
C) Statement of revenues, expenses, and changes in net position; and statement of net position.
D) Statement of activities; statement of net position; statement of changes in net position; and statement of cash flows.

Question 49

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 50

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 51

Which of the following would be considered service revenue of a health care entity?

A) Revenue from the hospital cafeteria.
B) Capitation fees received from a health maintenance organization.
C) Fee revenue received for providing medical transcripts.
D) Revenue received for the rental of an assisted living facility's conference room to a local not-for-profit.

Question 52

Prepare general journal form for the following transactions of Bothwell Regional Hospital, a nongovernmental not-for-profit hospital. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
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 by a donor 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 53

In accordance with the FASB Codification, 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 54

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

Question 55

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

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

Question 56

In accordance with the FASB Codification, donated medicines that normally would be purchased by a hospital should be recorded at fair value and credited to which of the following?

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

Question 57

Contractual Adjustments is properly characterized as:

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

Question 58

Which of the following is shown on a statement of changes in net assets?

A) An increase in net assets with donor restrictions.
B) A gain on the sale of equipment.
C) A loss from a discontinued operation.
D) A contribution without donor restrictions.

Question 59

An annual contributor to a nongovernmental not-for-profit hospital made an unrestricted pledge in October 2019 that will be paid in March 2020. Assuming the hospital's fiscal year-end is December 31, 2019, the pledge should be credited to:

A) Contributions-With Donor Restrictions in 2019.
B) Contributions-Without Donor Restrictions in 2019.
C) Contributions-With Donor Restrictions in 2020.
D) Contributions-Without Donor Restrictions in equal amounts in 2019 and 2020.

Question 60

Record in general journal form the following selected transactions for Avalon General Hospital, a nongovernmental not-for-profit institution. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
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 on 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 61

"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 62

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

Question 63

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