Question 1

With regard to the financial statements prepared by health plans, it can correctly be stated that

Accepted Answer

Health plan's annual report typically includes an independent auditor's report and notes to the financial statements. A is incorrect as not all health plans are required by law to provide an annual report. C is incorrect as the threshold for consolidation is typically higher than 20%. D is incorrect as health plans can prepare financial statements using GAAP or statutory accounting principles (SAP).

Question 2

The Brookhaven Company is the parent company of two subsidiaries: an HMO and an insurance company. The headings on Brookhaven's financial statements read "Consolidated Financial Statements of Brookhaven Company." From the following answer choices, select the response that correctly indicates, under the entity concept, whether the HMO and the insurance company are accounted for as separate entities and whether the subsidiaries' financial results would be included in Brookhaven's consolidated financial statements.

Accepted Answer

Under the entity concept, each subsidiary is considered a separate legal entity and their financial results should be included in Brookhaven's consolidated financial statements. Therefore, the first part of option A is correct (accounted for as separate entities), and the second part is also correct (results included in Brookhaven's statements).

Question 3

Two sets of financial accounting standards are generally accepted accounting principles (GAAP) and statutory accounting practices (SAP). One true statement about these financial accounting standards is that

Accepted Answer

Health plans are required to prepare their financial statements according to applicable laws, regulations, and accounting principles, particularly GAAP. While both GAAP and SAP are important sets of accounting standards, GAAP is generally considered the most important for health plans to follow in order to provide useful and reliable financial information to external users. Additionally, GAAP is established by the Financial Accounting Standards Board (FASB), a private organization that sets accounting standards for all types of businesses in the United States.

Question 4

A common physician-only integrated model is a group practice without walls (GPWW). One characteristic of a typical GPWW is that the

Accepted Answer

A GPWW combines multiple independent physician practices under one umbrella organization, allowing for greater coordination and shared resources among the member physicians.

Question 5

The Caribou health plan is a for-profit organization. The financial statements that Caribou prepares include balance sheets, income statements, and cash flow statements. To prepare its cash flow statement, Caribou begins with the net income figure as reported on its income statement and then reconciles this amount to operating cash flows through a series of adjustments. Changes in Caribou's cash flow occur as a result of the health plan's operating activities, investing activities, and financing activities. The basic formula for Caribou's income statement is

Accepted Answer

The formula for Caribou's income statement is Revenues - Expenses = Net Income (Net Loss). This represents the amount of profit or loss that the organization has made during a period of time.

Question 6

______________ HMOs can't medically underwrite any group - incl small groups.

Accepted Answer

The answer of ______________ HMOs can't medically underwrite any group...

Question 7

In the following paragraph, a sentence contains two pairs of words enclosed in parentheses. Determine which word in each pair correctly completes the statement. Then select the answer choice containing the two words that you have selected. The Igloo health plan recognizes the receipt of its premium income during the accounting period in which the income is earned, regardless of when cash changes hands. However, Igloo recognizes its expenses when it earns the revenues related to those expenses, regardless of when it receives cash for the revenues earned. This information indicates that the (realization/capitalization) principle governs Igloo's revenue recognition, whereas the (matching/initial-recording) principle governs its expense recognition.

Accepted Answer

The first pair of words enclosed in parentheses refers to revenue recognition, which is governed by the realization principle. The correct word to complete the sentence is "realization." The second pair of words enclosed in parentheses refers to expense recognition, which is governed by the matching principle. The correct word to complete the sentence is "matching." Therefore, the answer is (A) realization/matching.

Question 8

The following statements describe two types, or models, of HMOs: The Quest HMO has contracted with only one multi-specialty group of physicians. These physicians are employees of the group practice, have an equity interest in the practice, and provide

Accepted Answer

The answer of The following statements describe two types, or...

Question 9

The accounting department of the Enterprise health plan adheres to the following policies: Policy A-Report gains only after they actually occur Policy B-Report losses immediately Policy C-Record expenses only when they are certain Policy D-Record revenues only when they are certain Of these Enterprise policies, the ones that are consistent with the accounting principle of conservatism are Policies

Accepted Answer

The accounting principle of conservatism states that losses should be recognized immediately when they are probable, but gains should only be recognized when they are certain. Policies A, C, and D go against this principle by allowing gains and revenues to be reported only after they actually occur and when they are certain. Policy B aligns with the conservatism principle by requiring losses to be reported immediately, and Policy D also aligns by requiring revenues to be recorded only when they are certain. Therefore, the policies that are consistent with conservatism are A, B, and D.

Question 10

This concept, which holds that a company should record the amounts associated with its business transactions in monetary terms, assumes that the value of money is stable over time. This concept provides objectivity and reliability, although its relevance may fluctuate. From the following answer choices, choose the name of the accounting concept that matches the description.

Accepted Answer

The description matches the measuring-unit concept, which assumes that the value of money is stable over time and requires companies to record transactions in monetary terms to provide objectivity and reliability.

Question 11

If the Ascot health plan's accountants follow the going-concern concept under GAAP, then these accountants most likely

Accepted Answer

The going-concern concept assumes that the entity will continue to operate for the foreseeable future, and therefore, will not be liquidated. This means that the accountants will assume that Ascot will continue to operate and will not be liquidated, unless there is evidence to the contrary. Options A and B are not applicable to the going-concern concept, and option D is not necessarily true since GAAP and SAP may have different asset valuation policies.

Question 12

The Caribou health plan is a for-profit organization. The financial statements that Caribou prepares include balance sheets, income statements, and cash flow statements. To prepare its cash flow statement, Caribou begins with the net income figure as reported on its income statement and then reconciles this amount to operating cash flows through a series of adjustments. Changes in Caribou's cash flow occur as a result of the health plan's operating activities, investing activities, and financing activities. To prepare its cash flow statement, Caribou uses the direct method rather than the indirect method.

Accepted Answer

The description of Caribou's cash flow statement preparation aligns with the indirect method, which starts with net income and adjusts for changes in balance sheet accounts to calculate operating cash flows. The direct method, in contrast, lists cash receipts and payments directly.

Question 13

The Caribou health plan is a for-profit organization. The financial statements that Caribou prepares include balance sheets, income statements, and cash flow statements. To prepare its cash flow statement, Caribou begins with the net income figure as reported on its income statement and then reconciles this amount to operating cash flows through a series of adjustments. Changes in Caribou's cash flow occur as a result of the health plan's operating activities, investing activities, and financing activities. Caribou is engaged in an operating activity when it

Accepted Answer

Operating activities involve the revenue and expenses associated with the primary operations of the company. In the case of a health plan, providing healthcare services to its members is the primary operation, and paying expenses associated with those services would be an example of an operating activity. Purchasing or selling assets, disposing of a subsidiary, and repaying funds loaned by creditors are all examples of investing and financing activities, not operating activities.

Question 14

As part of the first step in its strategic planning process, the Trout health plan developed the following statements: Statement A-Trout will deliver quality healthcare to our customers at a reasonable cost. Statement B-Within five years, Trout will be recognized as the industry leader in all of our markets. Statement A can best be described as a

Accepted Answer

Statement A is a mission statement as it outlines the primary purpose of the Trout health plan. It describes what the organization aims to do for its customers. On the other hand, Statement B is a vision statement as it outlines a future goal for the organization - to be recognized as an industry leader in all of its markets within five years. It describes what the organization strives to become in the future.

Question 15

One true statement about cash-basis accounting is that

Accepted Answer

Health insurance companies and health plans that fall under the jurisdiction of state insurance commissioners must report some items on a cash basis for statutory reporting purposes. This is a requirement for them and is not necessarily applicable to all companies or industries. The other options are incorrect as cash disbursement is also important in cash-basis accounting (option A), most companies do not use a pure cash-basis accounting system (option B), and cash-basis accounting does not follow the realization and matching principles (option C).

Question 16

Under GAAP, three approaches to expense recognition are generally allowed: associating cause and effect, systematic and rational allocation, and immediate recognition. A health plan most likely would use the approach of systematic and rational allocation in order to

Accepted Answer

Systematic and rational allocation is used to allocate costs over time, such as depreciating the cost of a new computer system over its useful life.

Question 17

The McGwire Health Plan is a for-profit health plan that issues stock. Events that will cause the owners' equity account of McGwire to change include

Accepted Answer

All of the choices listed (retention of net income, payment of dividends, and purchase of treasury stock) will impact the owners' equity account of McGwire. Retention of net income will increase the account, while payment of dividends and purchase of treasury stock will decrease it.

Question 18

The Caribou health plan is a for-profit organization. The financial statements that Caribou prepares include balance sheets, income statements, and cash flow statements. To prepare its cash flow statement, Caribou begins with the net income figure as reported on its income statement and then reconciles this amount to operating cash flows through a series of adjustments. Changes in Caribou's cash flow occur as a result of the health plan's operating activities, investing activities, and financing activities. The main purpose of Caribou's balance sheet is to

Accepted Answer

The main purpose of a balance sheet is to measure the owners' wealth by showing the company's assets, liabilities, and equity at a specific point in time.

Question 19

The Zane health plan uses a base of accounting known as accrual-basis accounting. With regard to this base of accounting, it can correctly be stated that accrual-basis accounting

Accepted Answer

Accrual-basis accounting requires the entity to record revenues when they are earned and expenses when they are incurred, regardless of whether cash has actually changed hands. This provides a more accurate representation of the entity's financial performance and obligations. Option A is partially correct but incomplete, as accrual-basis accounting provides a more comprehensive view of obligations incurred regardless of whether the transaction is completed. Option B is incorrect as accrual-basis accounting is suitable for measuring profitability. Option D is incorrect as adjusting entries are a necessary part of accrual-basis accounting at the end of each accounting period.

Question 20

This concept, which is an extension of the going-concern concept, holds that the value of an asset that a company reports in its accounting records should be the asset's historical cost, not its current market value. Although this concept offers objectivity and reliability, it may lack relevance, particularly for assets held for a long period of time. From the following answer choices, choose the name of the accounting concept that matches the description.

Accepted Answer

The cost concept states that assets should be recorded at their historical cost, not their current market value. This offers objectivity and reliability, but may lack relevance for assets held for a long period of time.

Exam 3: Health Plan Finance and Risk Management