ACC HLTHCARE MGRS
ACC HLTHCARE MGRS HA 3375
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Chapter 9 Review 0 Interim nancial statements are nancial statements prepared during the course of a hospital s scal year 0 Important managerial decisions are made during the course of the scal year that requires the kinds or information provided by monthly statements If a hospital prepares interim nancial statements how often must adjusting entries be made How often must closing entries be made 0 Adjusting entries are made for each interim period every month for example 0 Closing entries are made only once a year on the last day of the scal year Chapter 10 review What is responsibility accountin Revenues and expenses are recorded and linked to the centers directly responsible for generating them What is a responsibility center Each organizational unit is a responsibility center performing an activity or function and headed by an individual responsible for attaining a mission 0 Expense center every center is an expense center because all centers incur expenses 0 Centers that generate revenues through the provision of patient services for which a speci c charge is made are referred to as revenue centers What are unassigned expenses Expenses that cannot be individually linked to one responsibility center because they have no control of them Why does AHA publish a chart of accounts AHApublishes char of accounts to promote uniformity among hospital transaction records 1st digit is the account type 2nd digit is the net asset group 3rd amp 4th are the primary sub classi cations 5th digit is the secondary sub classi cation 6 amp 7th are utilized as needed by each organization Chart of Accounts 1 Assets 2 Liabilities 3 Net Assets 4 Revenues 5 Deductions 6 Expenses Chapter 11 Review What are the advantages of several special journals Overcomes the inef ciency of the single journal procedure and provides more detailed information Distinguish between general ledger and subsidiary ledger General ledger contains accounts for each account in the hospital s chart of accounts Posted once a month Subsidiary ledger supports the control accounts by providing detailed information Examples include accounts receivable ledger accounts payable ledger and the payroll ledger Sundry debits and credits column in a special journal The purpose of having the sundry debits and credits columns in a special journal is to provide a space for recording entries to accounts for which a special column has not been included in the journal Entries in the sundry columns must be individually posted but entries in these columns will not be frequent or numerous Two advantages of maintaining control accounts in the general ledger of a hospital One is to reduce the size of the general journal and the second is to promote accuracy and facilitate the balancing of the book when errors occur How would you determine that a special journal balances Cross foot the column totals to ascertain that the total of debit columns equals the total of credit columns Whenever a debit posting is made to a general ledger control account one or more credit postings of the same aggregate total must be posted to the related subsidiary ledger Do you agree Explain your answer No whenever a debit posting is made to a general ledger control account one or more debit postings of the same aggregate total must be posted to the related subsidiary ledger Why must you post more frequently to subsidiary ledgers Transac ons must be posted more frequently because the subsidiary ledgers provide information that is required and used daily Describe the posting procedure for the revenue journals and the cash receipts journal At the end of the month the journal columns are footed and the totals are posted to the general ledger Daily pos ngs of the charges to patients are made to the accounts receivable subsidiary ledger Daily pos ngs are also made to the accounts receivable ledger to give individual patients credit for the patient s credit for the payments received from them or on their behalf from their third party sponsors An inpatient charge ticket for 60 dollars was correctly recorded in the inpatient revenue journal but the patient s account in the accounts receivable subsidiary ledger was incorrectly debited for only 6 dollars How will this error be discovered This error will be discovered at the end of the month when the accounts receivable control account in the general ledger is found to be in excess of the subsidiary ledger balance 0 Voucher A document prepared for approving disbursements that includes the auditing of invoices and the securing of authoriza ons Voucher system Before a check is written an inves gation is made to a liability account When the check is written an entry is made in the cash disbursement journal Posting procedure for the payroll journal voucher register and cash disbursements journals 0 All pos ngs from the payroll journal are made on a monthly basis 0 At the end of the month the voucher register column totals are posted to the general ledger accounts Daily postings are made to the accounts payable subsidiary ledger to maintain a daily record of the amounts due to individual hospital creditors 0 Monthly pos ngs are made to the general ledger of the column totals in the cash disbursements journal Daily debit postings are made to the accounts payable subsidiary ledgers An invoice for the purchase of 150 dollars of supplies was correctly recorded in the voucher register but the supplier s account in the accounts payable subsidiary ledger was incorrectly credited for 510 dollars How will this error be discovered This error will be discovered when he accounts payable control account in the general ledger is reconciled with the accounts payable subsidiary ledger and the subsidiary ledger is found to be in excess of the general ledger balance Hartful Hospital provides many outpatient services on a cash basis In such cases would it be appropriate to bypass the outpatient revenue journal and record the transaction directly in the cash receipts journal only to debit cash and credit outpatient revenue No This may be satisfactory but it does not allow for the ex a measures of control provided by using the outpatient revenue journal What is the purpose of the check column in the inpatient revenue journal It is used to indicate whether or not the patient accounts in the accounts receivable subsidiary ledger have been posted for the individual charges making up the total charge to the general ledger accounts receivable control accounts Imprest Accounts cashpayroll checking account When the payroll checks are cashed by employees the payroll checking account automatically clears t0 the zero or imprest balance maintained in the account Removes the large volume of paychecks from general checking and simpli es reconciliation of the payroll checking account Chapter 12 Review State the basic objectives of accounting for services rendered to inpatients and outpatients To make prompt and accurate record of all services rendered regardless of the amounts the hospital expects to collect for those services Describe how the amounts to be charged to inpatients for services rendered to the generally are determined These charges are compiled from information Obtained from the daily census report Forms and procedures differ but the determination of charges and revenues for daily patient services basically is a matter of multiplying occupied rooms beds by established daily charges for those accommodations Describe brie y how the amounts to be charged to outpatients for services rendered to the generally are determined Charges t0 outpatients also may be determined in much the same way as for inpatient A charge ticket is originated either at a centralized outpatient reception desk or in the professional departments providing the outpa ent services In some cases the outpa ent charge tickets are summarized by personnel of the service rendering department in daily service logs How often should postings be made from the inpatient and outpatient revenue journals Daily pos ngs must be made to the accounts receivable subsidiary ledger to maintain a current day by day balance in each patient s account How often should postings be made from the cash receipts journal The postings of entries from the cash receipts journal are the same as for the revenue journals Daily pos ngs are made to the patient s ledger monthly pos ngs of column totals are made to the general ledger What are some of the basic features of a good system of internal control over revenues and cash receipts See chapter 16 Chapter 13 review Give four reasons why employee compensation generally composes more than 50 percent of total operating expenses in hospitals 0 The hospital is largely a personal service labor intensive business that generally requires ve employees per patient The hospital necessarily must employ many highly skilled specialists and professional people who command relatively high salaries The nature and importance of healthcare services is such that high quality adequately paid personnel should be employed Competition from industrial and commercial businesses for such personnel has let do an increased general level of compensation What is the current FICA tax rate What is the max annual amount of FICA tax that is paid by and employee The 2002 FICA tax rate is 62 on the rst 80400 The maximum annual amount of FICA tax that is paid by an employee is 498480 Other than taxes list ve types of withholding deductions that often are made from hospital employees paychecks 0 Government savings plans Premiums for insurance Union membership dues Retirement plans Charities Describe the general procedures followed in computing the gross payroll in a hospital for a given pay period A payroll clerk is able to compute gross pay during pay periods by time card time reports or any other source document collected How should hospital accountants record donated services Donated at fair market value when 0 The donor and hospital have the equivalent of an employer employee relationship 0 There is an objective basis for determining the amounts that might otherwise have been paid for such services Good internal control systems for a hospital payroll o The employee responsible for compilation of payrolls should neither sign nor distribute checks If a mechanical check signer is employed its use should be strictly controlled The distribution of payroll checks should be centralized and procedures should be employed that ensure that employees receiving checks are properly identi ed The method of distributing checks as well as the person who distributes checks should be changed occasionally Unclaimed paychecks should not be returned to the payroll accounting unit but should be investigated and retained for a reasonable period of time by a person who is independent of the payroll function As a part of the regular accounting routine should unemployment taxes and the hospital s share of FICA taxes be charged to departmental cost center accounts No These taxes are not directly controllable by department heads and supervisors State workmen s compensation laws affect the hospital s payroll accounting States have workmen s comp laws that provide various bene ts to disabled workers In some cases a taxis imposed on the employer but more often the state laws establish standard bene ts and allow hospitals to provide for such bene ts through the purchase of appropriate insurance from a commercial insurance company The premiums paid by the hospital are charged to expense employee bene ts Describe the operation of an imprest payroll checking account When the payroll is determined a check is drawn against the general checking account This check is deposited in the hospitals payroll checking account but no entry is made in the payroll checking account to record the deposit The individual payroll checks were drawn on the payroll checking account but no entry was made to that account for those checks When the payroll checks are cashed by employees the payroll checking account automatically clears to the zero or imprest balance maintained in the account This procedure removes a large volume of paychecks from general checking and simpli es reconciliation of the payroll checking account What speci c information would you expect to find on an employee s individual earnings record 0 Name Social Security Number Department Employee number Number of exemptions claimed Earning listed by type Gross amount of earnings Net amount of earnings amount of check Date of employment Next of kin Chapter 14 Review What is the purpose of a purchase requisition Who prepares is How many copies are usually made To whom are the copies sent and why 0 The purpose is to provide a means by which department heads can make known to the purchasing department that certain goods or services should be purchased The form is generally executed by a department head or inventory storekeeper A copy of the purchase requisi on is sent to the purchasing department to inform that department of the items to be purchased a duplicate copy is retained in a le as evidence that the request was made What is the purpose of a purchase order Who prepares is How many copies are usually made To whom are the copies sent and why 0 The purpose is to provide a means by which the purchasing department can place orders with suppliers for purchases of goods and services 0 To form is prepared by purchasing department 0 Five or six copies are usually made 1 The accoun ng department for subsequent use in invoice audit and approval for payment The requisitioning department and or storekeeper as noti cation that the order has been placed Two copies are sent to the vendor company One copy for the vendor s own use the other is signed and returned to the hospital s purchasing department as an acknowledgement of the order and the vendor s intent to ll it In some systems another copy of the purchase order is routed to the hospital s receiving department A nal copy is retained by the purchasing department in an un lled orders le which is carefully monitored to avoid delays in the acquisition of desired supplies and services 0 03 1 U1 Describe the purchasing function in hospitals Procurement of supplies and services is a function of major importance in hospitals The purchasing responsibility consists basically of acquiring required supplies and services of the appropriate quality in the proper quanti es at the times needed and at reasonable costs Describe the receiving function in the hospitals On receipt of purchased supplies from vendors the hospital s receiving department manager has the responsibility for counting weighing or otherwise measuring the quantities of goods received What is the purpose of a receiving report Who prepares it How many copies are generally made To whom are the copies sent and why 0 The purpose is to serve as a record of the quantity of goods actually received 0 The report is prepared by the receiving department 0 Four copies are usually made 1 The purchasing department where it is used to clear the related purchase order from the un lled order le 2 The accounting department to be used in subsequent invoice processing and approval for payment 3 Another copy follows the goods into the storeroom 4 A nal copy may be retained by the receiving department as a work record What documents generally are included in a voucher package Purchasing order the receiving report the vendor s invoice and the voucher check form Describe the voucher system as a means of internal control over cash disbursements The voucher system works as a means of internal control over cash disbursements because it requires three procedures to be completed before payment will be made How often should posting be made from a the voucher register b the cash disbursement journal Daily postings should be made from these journals to the accounts payable subsidiary ledger monthly postings should be made of column totals to the general ledger accounts Chapter 15 Review Distinguish between unrestricted and restricted resources Restricted resources may only be used for speci c use and purposes such as construction purchase of equipment or nancing charity work research and education Such resources are not available for any purpose other than that speci ed by the donor Unrestricted resources are not restricted in any way and such assets are available for use at the discretion of the governing board De ne fund accounting Why is fund accounting a useful system of accounting for many hospitals Fund accounting may be de ned as a system of accounting in which the resources of a hospital are segregated in the accounting records into self balancing sets of accounts called funds for the purpose of carrying speci c activities or particular objectives in accordance with legal and other restrictions Fund accounting is a useful system of accounting because of the legal and moral obligation on the part of the hospital to comply fully with donors restrictions and stipulations There is also an administrative or managerial need to maintain in the accounting records a careful distinction between unrestricted and restricted resources What is a boarddesignated fun Explain why the resources of funds of this kind are not classi ed as restricted resources A board designated fund is a group of accounts containing assets which although unrestricted by external donors have been designated or earmarked by the governing board for particular uses or purposes Such funds are not to be classi ed as restricted resources because if necessary the bard has the power to eliminate or change its designations for such assets Restrictions imposed by external donors cannot be changed by the governing board The term restricted should not be used in connection with board designated resources because from a legal point of view such resources are not restricted Offside Hospital received donations of a an item of medical equipment having a fair market value of 100000 and b 100000 cash restricted by the donor to the purchase of medical equipment How should each of these donations be accounted for when received 0 The receipt of an item of donated medical equipment should be recorded as a debit to equipment and a credit to the unrestricted fund balance The receipt of 100000 that is restricted by the donor to the purchase of medical equipment shouldbe recorded in the plant replacement and expansion fund balance The treatment differs because the receipt of cash restricted to the purchase of equipment must be recorded as a restricted resource until such time as the donor s requirement has been met that is when the equipment is actually purchased Neither the receipt of donated equipment not of money donor restricted to the purchase of equipment shouldbe recorded as revenue Such receipts are regarded as contributions to the permanent capital of the hospital When should resources be transferred from the speci c purpose funds to the unrestricted fund Once recorded as speci c purpose funds these resources remain restricted fund the money remains in the plant replacement and expansion fund When the equipment is purchased by the unrestricted fund the money is transferred to the unrestricted fund When should resources be transferred from the plan replacement and expansion funds to the unrestricted fund of the hospital Until the equipment is purchased using the resources of the unrestricted fund the money remains in the plant replacement and expansion fund When the equipment is purchased by the unrestricted fund the money is transferred to the unrestricted fund When should resources be transferred from the unrestricted fund to the plant replacement and expansion funds When should resources be transferred from the endowment funds to the unrestricted fund 0 Resources may be transferred from the unrestricted fund to the plant replacement and expansion fund when third party payers restrict reimbursements for depreciation to the purchase of plant assets In unusual cases resource transfers may occur when the plant replacement and expansion fund borrows money from the unrestricted fund 0 Resources may be transferred from the endowment fund when term endowments expire when endowment fund investment income is unrestricted donors or when money is borrowed where legal from the endowment fund by unrestricted fund If investments held in a restricted fund are sold at a gain in what fund should the gain be recorded The general rule is that gains on investments of restricted funds are recorded only in the restricted funds In what fund should unrestricted investment income earned on endowment fund investments be recorded Investment income on endowment funds is directly recorded in a fund other than the endowment fund Gains and losses on endowment fund investments however generally are recorded in the endowment fund on the theory that gains and losses follow the endowment fund principal rather that the endowment fund income In the context of fund accounting what does the word fund mean Funds are self balancing set of accounts for the purpose of carrying on speci c activities or attaining particular objectives in accordance with legal and other restrictions List and describe the four types of funds used in hospital accounting 0 An unrestricted fund is maintained by all hospitals using fund accounting This fund includes all hospital resources with related obligations that are not restricted by any external authority or donor All of the resources of this fund are available for general operating activities at the discretion of the hospital s governing board In addition the accounts of the unrestricted fund include all the revenues and expenses to be reported in the hospital s income statement The speci c purpose fund is used to record resources that are restricted by donors for the purposes other than plant asset acquisitions or endowments Such purposes include charity research and education The plant replacement and expansion fund includes cash and other restricted resources received from donors and other external authorities for the acquisition of plant assets 0 The endowment fund consists of contributed resources that by donor restriction are not to be expended but are to be held intact for the production of income Income from investments of endowment funds may be donor restricted or immediately available for general operating purposes Chapter 16 Review What are quick assets Quick assets consist of cash and those other assets temporary investments and receivables that can be quickly and directly converted into cash De ne cash Are postage stamps postdated checks and employee IOUs properly includable in cash If not how should such items be classi ed in the balance sheet 0 Cash may be de ned as consisting of actual money and other immediately available resources or credit instruments generally accepted as media of exchange and used as money equivalents This includes coin and paper currency demand deposits in banks checks and money orders 0 Postage stamps are supplies not cash Postdated checks and IOUs from employees are properly treated as receivables For what reasons are bank reconciliations prepared By whom should bank reconciliations be prepared Bank reconciliations aid in the prevention and detection of fraud the discovery of errors in accounting records and the determination of the accuracy of the bank statement Bank reconciliations should be supervised by the hospital controller and should be performed by someone who does not handle cash or cash records Explain how you would determine the appropriate imprest amount with which to establish a petty cash fund The appropriate imprest amount for a petty cash fund can be determined by a study of petty cash disbursements over a period of time An amount should be established which is neither excessive nor inadequate Under what circumstances is the petty cash account debited or credited Nowhere in the reimbursement process is the petty cash account debited or credited This is done only when the imprest amount of the fund is increased or decreased List 10 of the most important basic principles typically incorporated into internal cash control systems Nquot All hospital employees who handle or have access to cash should be adequately bonded Petty cash and change funds should be limited in number and should be established in minimum imprest amounts Bank accounts should be reconciled regularly by persons other than those who handle cash receipts sign checks or maintain the cash journals and records There must be a distinct segregation of duties between cash handling and cash accounting All cash record forms checks bank deposit tickets cash receipt slips and petty cash voucher should be prenumbered and accounted for by numerical sequence whenever this is feasible De nite responsibility for cash handling functions and for custody of cash funds should be assigned to speci c employees The fewest possible employees should be given access to cash The work of business of ce personnel should be made complimentary so that an error made by one automatically will be discovered by another 91 0 00gt 9 Physical protection should be provided through the use of vaults bank facilities cashiers cages locked cash drawers and similar devices 10 De nite procedures should be established in writing for the handling of all cash transactions Name three methods by which bad debts may be estimated for accrual basis accounting purposes Which method is best 0 The three methods of which bad debts may be estimated are these 1 Application of a percentage based on past experience to the balance of accounts receivable at the end of the reporting period 2 Application of a percentage based on past experience to the total of charges to patients accounts during the reporting period 3 Determination through an analysis of individual accounts in the patients ledger taking into account the length of time each account has remained unpaid aging the accounts receivable 0 As a matter of actual practice hospitals often employ all three methods comparing the results of each so as to arrive at the most accurate estimate or probably bad debts Describe brie y some of the procedures that should be observed to maintain effective internal control over receivables Receivables control begins in the admitting process where complete and accurate information must be secured so that an initial determination can be made of each patient s nancial status and unnecessary delays may be avoided in subsequent billing and collection efforts Once patients are admitted the system should be such as to provide a high degree of assurance that all billable services rendered are promptly and accurately charged to patient s accounts Identify and explain the nature of three deductions that may be made to arrive at a balance sheet valuation for accounts receivable 0 Bad debts represent the receivables arising from services provided to self responsible patients that prove to be uncollectible Contractual adjustments represent the contractual agreements with third party payers where hospitals receive less than their full rates and are sometimes prohibited from collecting the difference from patients that are covered by the contract 0 Charity service represents the uncollectible receivables arising from the provision of charity service to patients De ne the term temporary investments List some common types of temporary investments available to hospitals 0 Temporary investments are investments of temporarily excessive cash balances The investment objectives should be safety marketability and a reasonable rate of return Common types include bank saving accounts certi cates of deposit US treasury bills or other types of income producing assets Brie y describe the imprest system for operating a petty cash fund and state the principal advantages of the imprest system from the standpoint of internal control Imprest funds are established in a xed amount that is replenished periodically to ensure that the fund does not run out of money The xed amount ensures that then the event of theft only the xed amount is best Chapter 17 Review Indicate some of the major requirements for a good system of internal control over hospital inventories Responsibili es for inventory should be assigned carefully number of locations shouldbe minimized locations should be kept clean lighted and locked locations should have limited access inventory should only be released with an inventory requisition amp par levels should be devised to ensure that inventory levels are adequate but not excessive Distinguish between the periodic inventory system and the perpetual inventory system What are the advantages and disadvantages of each system Which system should be used by hospitals 0 Under the periodic inventory system no day to day record of supplies Inventory is maintained through accounting records This has the advantage of simplicity and clerically inexpensive Under the perpetual inventory system records are maintained to provide a con nual record of supplies purchased used and on hand This has the advantage of being immediately available as to inventory levels but is costly system to administer o The choice of inventory systems depends mainly on the characteris cs of supply items Indicate the reasons that a considerable amount of importance should be assigned to inventory accounting and management in a hospital The annual usage of supplies is a signi cant cost element As much as 15 of opera ng expense may be represented as supplies Like cash inventory is highly susceptible to theft Also the cost of maintaining and inventory is substantial Distinguish between FIFO LIFO costing methods In a period of rising prices which method would tend to result in the recording of the highest costs for supplies used In a period of rising prices which method would tend to result in the highest endofperiod inventory FIFO assumes that the supplies are pulled from the oldest in stock LIFO assumes that the supplies are issued in terms of the most recently incurred cost In a period of rising cost the LIFO method would result in the recording of the highest cost of supplies used and FIFO would result in the highest end of the period inventory Because of an error Quest Hospital s December 31 20x1 inventory was understated by 19000 What is the effect of this error on the hospitals reported excess of revenues over expenses for 20x1 and its balance sheet at December 31 20x1 What effect will this error have on the hospitals 20x2 excess of revenues over expenses 0 This error would cause excess of revenues over expenses for 20x1 to be understated and overstated the excess of revenues over expenses in 20x2 De ne current liabilities Give 6 examples of accounts that are reported in current liability section of the hospital s balance sheet 0 Obliga ons that mature and normally will be paid within approximately one year from the balance sheet date Examples Notes payable AP current maturities of long term debt accrued liabili es for expenses and other items and deferred revenue What are the nancial consequences of a continued failure to take advantage of cash discount opportunities in the payment of accounts payable If the discounts are continuously missed they will be given no recognition in the accounting records and this will result in the charges to patients bills being higher than what they should be What are some of the major features of a satisfactory system of internal control over hospital liabilities 0 Appropriate authorization of purchase borrowing payroll or other transactions giving rise to liabilities o Accurate determination of the amounts in which such liabilities are recorded Chapter 18 Review Distinguish between land and land improvements 0 Land account includes the cost of earth surface used in ordinary course by the hospital 0 Land improvements consist of on site water and sewer systems fencing and walls sidewalks shrubbery and trees and paving of roadways Distinguish between xed equipment and major movable equipment 0 Fixed equipment account includes the cost of equipment that is af xed to and constitutes a structural component of the hospital building 0 This includes mechanical and electrical systems elevators generator pumps boilers and refrigeration machinery 0 Major movable account are readily moved from one location to the next a minimum useful life of usually 3 years and a unit cost suf ciently large to justify the expense incident to control by means of a subsidiary equipment ledger o This includes desks chairs beds automobiles accounting machines sterilizers operating tables and radiology equipment Describe brie y the proper accounting procedure for minor equipment Many accounting systems provide that only the cost of the original supply should be charged to the asset account This original cost will depreciate and all other purchases are charged to expense List ve items that generally should be included in the cost of purchased equipment Should interest be included in the cost of equipment purchased on an installment or deferred payment plans 0 Billed price of the asset Freight charges Sales tax Fees and commission paid Installation cost The cost of a purchased plant asset however generally should not include interest What are the advantages of maintaining a detailed subsidiary ledger for plant assets Such records support the periodic depreciation charges along with a basis for insurance coverage and claims permit the accurate recording of asset retirements and disposals and assist in securing effective internal controls over the plant asset investment How are each of the following determined a Depreciable cost of a plant asset is its acquisition cost minus its estimated SV b Useful life is determined largely by judgment and depends heavily on the hospital s plant asset retirement policy and experience c SV has no simple formula but it is a matter of judgment applied by the hospital in view of its policy and experience expected future market conditions for used or scrapped equipment and other factors Depreciation expense is a measure of the decline in the value of plant assets during an accounting period Yes Depreciation is the wearing out process of a plant asset Distinguish between the group depreciation method and the composite rate depreciation method 0 Group depreciation method a number of similar plant assets are depreciated as a single unit 0 Composite depreciation method a number of dissimilar assets may be depreciated as a single unit What is meant by the funding of depreciation What entry is made to record the funding of say 79000 of depreciation 0 Funding of deprecia on is the process which cash resources are set aside in order to nance renewal or replacement plant assets DBoard designated assets 79000 CCash General Checking Account 79000 Summarize brie y the accounting procedure to be followed when an existing item of equipment having a book value of 40000 and a fair market value of 45000 is traded along with 13000 cast for a new item of equipment listed at 60000 The general accounting rule is that the cost of an asset received in an exchange is the fair market value of the assets given up or the fair market value of the asset received whichever is more clearly evident Chapter 19 Review Distinguish between temporary investments and longterm investments 0 Temporary stocks and bonds are those that management intends to hold for only a short period of time generally not in excess of one year 0 Investments not mee ng that criterion are classi ed as long term When securities 0f10ngterm investment nature are acquired by donation at what amount are such assets initially recorded in the hospital s accounts They are recorded in the appropriate fund at their fair market value when received In what fund should the hospital record income earned on longterm investments In what fund should gains and losses on sales of longterm investments be recorded 0 All income on unrestricted fund investments and all unrestricted income on investments of the restricted funds must be reported as nonoperating revenues or the unrestricted fund Donor restricted investment income generally is recorded in either the speci c purpose fund or the plant replacement and expansion fund 0 Gains and losses on the disposition of long term investments usually are recorded in the fun which the investments were carried as assets Explain what is meant by the declaration date the record date and the payment date with respect to corporate dividend distributions resulting from hospital investments in corporate stocks a Declara on date is when the board of directors voted dividend payment approval b Record date is the date which a determination is made of the names of the stockholders en tled to the dividend on the basis of company s record c Payment date is when the company will mail out the dividend checks What are some of the major features of a satisfactory system of internal control over hospital investments in securities 0 Purchas and sales of investment securities should be authorized by the board 0 Stock and bond certi cates should be kept in a safe place 0 Regular reports of investment activity should be managed and given to the board 0 Employees how have access to the accounting records should not have access to investment securities When corporate bonds are purchased between interest payment dates the hospital purchaser must pay accrued interest since the last interest payment date Why The bond issuer will always pay a full six months interest on each interest payment date regardless of the number of months the bonds have been held by the investors When corporate bonds are purchased at a price higher or lower than face value the premiuln or discount must be amortized by the purchaser What is the purpose of amortizing bond premium or discount If bond premiums or bond discounts were not amortized over the entire period the entire premium or discount would need to be recognized at time or purchase which would misrepresent the effect What sections of the hospital balance sheet does one nd the following accounts a Temporary investment current assets b Long term investments bonds are noncur39rent assets c Accrued interest receivable current asses d Long term investment stocks are noncurrent assets e Dividends receivable current assets Chapter 20 Review How are current and longterm liabilities different 0 Current liabilities arise from informal contractual arrangements 0 Long term liabilities are based on written contract such as a mortgage document bond indenture or lease agreement a Abond indenture is a contract which spells out the terms of a bond issue b Registered bonds are those on which interest is paid only to bond holders of the recor c No record is kept of the owners of COUPON BONDS rather interest is paid to all bondholders who present the periodic interest coupon d SERIAL BONDS mature in installments over a period of years e ATERM BOND issue matures on a single xed maturity date f Some bonds at the option of the hospital may be CALLABLE at speci ed times on payment of a call price that usually is higher that the face value of the bond g SECURED BONDS often known as mortgage bonds involve pledging speci c plant assets under liens as security to bondholders h In many instances hospitals have issued REVENUE BONDS on which interest is paid from speci ed revenue sources i DEBENTURES are unsecured bonds How should unamortized bond discount unamortized bond premium and unamortized bond issue costs be presented in the hospitals balance sheet 0 The unamortized bond discount is deducted from the face amount of the outstanding bonds in the long term liability section of the balance sheet o The unamortized bond premium is added to the face amount of bonds outstanding o The unamortized bond issue costs should be included in the noncurrent assets of the unrestricted fund in a deferred charges or other assets category A hospital bond issue dated April 1 2001 is actually issued for cash on June 1 2001 The purchaser of these bonds will pay the hospital for two months of accrued interest Why When bonds are issued between interest payments dates the hospital collects accrued interest from the purchasers as part of the transaction This enables the hospital to pay a full 6 month interest at each semiannual interest payment date Distinguish between the nominal rate of interest and the effective rate of interest for a hospital bond issue 0 The nominal rate of interest is predetermined on the basis of expectations concerning the rate of interest investors will demand at the time the bonds are issued 0 The effective rate of interest is the rate that produces the nominal rate after compounding For what reasons might a hospital bond issue sell at a price that is higher or lower than face value Bonds sell at premium if the nominal interest rate is higher than the market rate they sell at discount if they pay interest at a rate less than the market rate If a hospital bond issue is sold at a discount will the monthly charge to bond interest expense be greater or less than the nominal amount of interest per month When bonds are sold at a discount the monthly charge to bond interest will be greater than the nominal amount A hospital bond issue is sold at a premium on January 1 2001 Interest on the bonds is payable annually on December 31 Will the annual interest expense recorded on the hospital s books be greater or less than the amount of annual interest actually paid to the bondholders When bonds are sold at a premium the amount of interest will be less than the amount of interest actually paid to the bond holders If the market rate of interest is higher than the nominal rate of interest speci ed in a hospital bond issue will the hospital s bonds sell at a price that is higher or lower than face value They will sell at a discount if they pay interest at a rate less than the market rate Chapter 21 review If a hospital s annual nancial report includes a balance sheet statement of operations and statement of changes in net assets why should a statement of cash ows also be included These statements provided important information concerning the operating results and nancial position of the hospital Certain important aspects of the operating nancing and investing activities are not disclosed by or made clearly apparent from an examination of statements of operations and balance sheets alone State the equation for the statement of cash ows CEOA LE In the context of the statement of cash ows list three major possible sources of cash in ows 0 Cash in ows normally result from an increase in the value of the right hand side of the equation that is and increase in net assets or a decrease in other assets Increases in liabilities can occur if the hospital issues bonds or borrows money from a bank Increases in net assets generally arise from an excess of revenues over expenses A decrease in other assets can occur if long term investments or plant assts are sold In the context of the statement of cash ows list three major possible sources of cash out ows 0 Cash out ows normally result from decrease in the value of the right hand side of the equations that is a decrease in liabilities a decrease in net assets or an increase in other assets A decrease in liabilities can occur if the hospital makes payments on accounts payable repays the principal amount of bank loans or retires long term debt A decrease in net assets generally arises from an excess of expenses over revenues Increases in other assets can occur if new long term investments or plant assets are purchased Under the indirect method depreciation expense is added back to excess of revenues over expenses to obtain the net cash ow from operating activities Is depreciation expense a source of cash in ows Depreciation expense is added back to excess of revenues over expenses because it is a non cash expense and does not require cash What is the purpose of a statement of cash ows It provides a summary of all signi cant cash ows relating to the operating nancing and investing activities of the hospital a Hospital OPERATING ACTIVITIES are those directly or indirectly related to the provision of healthcare services to the patient b The INVESTING ACTIVITIES of a hospital generally consist of transactions in which the hospital purchases and sells investments in securities c FINANCING ACI IVITIES generally are transactions that involve the acquisition and repayment of resources obtained through short term and log term borrowings in the form of bonds payable mortgages payable and notes payable Distinguish between the direct and indirect methods of reporting cash ows from operating activities Which do you prefer 0 Direct method cash receipts and disbursements are presented by major classes of revenues and expenses 0 Indirect method the reconciliation is moved up into the body of the statement and is substituted for the presentation of cash in ows and out ows from operating activities A hospital acquired an item or equipment in exchange for a longterm note payable How should this transaction be reported in the statement of cash ows This transaction results in an increase in a non cash asset and an increase in a liability Do all expenses in the income statement represent cash out ows in the current period Do all revenues in the income statement represent cash in ows in the current period These cash in ows and cash out ows may arise from revenues and expenses that were recognized in a prior period ones recognized in the current period or some that will be recognized in one or more future periods
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