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A comprehensive guide to financial ratio analysis in healthcare management. It covers various types of ratios, including liquidity, profitability, activity, and capital structure ratios. The calculation and interpretation of each ratio, providing practical examples and insights into their significance in healthcare financial management. It also explores asset mix and financing mix strategies, offering valuable knowledge for healthcare professionals seeking to optimize financial performance.
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Horizontal analysis % change solution [(current year - past year) / past year] x 100 compares financial information over several time periods in order to show growth rates and trends over that span of time.
CAGR solution [(Ending Value / Beginning Value) ^ (1 / # of years)] - 1 average growth rate for period of time
Trend analysis solution ((CY or any year after that-base year)/base year) X 100 base year= past year -Compared changes over a period of time by comparing each year w base year
Vertical analysis % - Answer (specific item value/base value) x 100 -proportion of the base within the same period (IS: item is expressed as % of total rev; BS: item is % of total assets) -expense and resource allocation, profitability analysis -allows comparing organizations of different sizes -higher % in LT debt than total net assets, there is more risk
Liquidity ratios - Answer How well is org positioned to meet ST liabilities -use BS -current; quick; acid test; days in a/r; days cash on hand; ave pmt period
Current ratio - Answer CA/CL
-how org uses CA to pay off CL; >1 desired -how well org is positioned to meet current obligations w current resources
Quick ratio - Answer (Cash+ marketable securities (ST investments)+ net recievables)/ CL -NR is $ collected from pts -more liquid (stringient) than current ratio -Net a/r is relatively liquid -desired: above ->1 indicates that the organization can meet its short-term liabilities without financial strain.
Acid test - Answer (Cash + marketable securities)/ CL -MS: ST investment -most stringent test of liquidity; most liquid -how much cash is available to pay off current obligations -desired: above
Days in A/R - Answer (Net pt A/R) / (net pt rev/365) Aka net a/r / ave daily pt rev -how fast a hospital turns its receivables into cash -how many days of revenue is tied up and uncollected -prefer: lower; want number low
Days cash on hand - Solution (Cash+mkt sec+LT investments) / ((Op. exp- dep and amort exp)/365) -Number of day's worth of expense and organization has, as its most liquid assets, to cover its -preferred: greater than
-% of operating expenses that relates to labor
Operating margin - Answer Operating Income / Total Operating Revenues -proportion of profit earned for each dollar of operating revenue -desired: above 0displayed as %i
Non operating revenue - Answer Non op. Rev/ total op rev -how dependent company is on non pt rev to pay off -displayed as %
Return on total assets - Answer Excess of Revenue over Expenses / Total Assets -(NI/ total assets for profit)
Return on net asset - Answer Excess of revenue over expenses/ net assets -non profit; profit for each $ of NA or equity -net income/owners equity for profit -displayed as %
acitivity ratios - Answer -how useful/ productive/ efficient is the company producing revenue -total asset turnover; fixed assetturnover; age of plant
Total asset turnover - Answer Total Operating Revenue / Total Assets
-for every $ of assets, how many $ of op. Revenue is generated -decreasing amt means they arent earning enough revenue -expressed as number/decimal -desired: above
Fixed asset turnover - Answer Total operating rev / net plant and equipment -for every $ for fixed asset, how many $ of op rev is generated -decreasing value means they are not earning enough; need to incentivize staff to generate more revenue -desired: above
Age of plant - Answer accumulated depreciation / depreciation expense -older age means cash needs to be spent soon to replace old equipment -expressed in years
Capital structure ratios - Answer How are the org's assets financed and is it positioned to take on new debt -risky vs non risky funding
LT debt to NA (or equity) - Answer LT debt / NA -on BS -proportion of asset financed by debt vs not through debt -ratio>1= debt>equity= more assets r financed thru debt -higher number=higher reliance on debt -desired: below
NA (or equity) to total assets - Solution NA / Total assets -percentage of total assets financed by equity
B. How many days a hospital takes to pay its LT debt C.How many days a hospital takes to pay its bills or current liabilities D. How many days a hospital takes to recover its net assets - Answer C. How many days a hospital takes to pay its bills or CL
Age of plant ratio complements the fixed asset turnover rate T or F - Answer True; -age of plant: average age of an organization's FIXED assets -Fixed asset turnover: how efficiently an organization generates revenue from its fixed assets. -If the age of plant ratio reflects older assets, the fixed asset turnover ratio may also decrease as efficiency decreases
Liquidity ratios measure: A. Op rev per adj discharge B. Op exp per adj discharge C. Ability to meet ST obligations, collect receivables and maintain cash D. Salary and benefit exp - Answer C. Ability to meet ST obligations, collect receivables and maintain cash
Horizontal analysis only considers the % change in a line item from one quarter to another T or F - Answer F; multiple periods not just one
Capital structure ratios address how an org's assets are financed and how able the org is to take on new debt T or F - Answer T
Which is not a point to consider when using and interpreting ratios? A. Ensure reliability of data B. No one ratio is better than any other ratio C. With benchmarking, its not necessary to make sure the same formula is used
D. A ratio can best be interpreted relative to benchmark - Answer C. With benchmarking, its not necessary to make sure the same formula is used; it IS NECESSARY to use same formula
Activity ratios answer the question of how profitable the org is T or F - Answer F
Days cash on hand ratio measures A. Number of days a hospital can cover its daily cash op exp with its fixed assets B. Number of days a hospital can cover its daily cash op exp with its cash and investments C. Number of days a hospital can cover its daily cash op exp with its total assets D. Number of days a hospital can cover its daily cash op exp with its liabilities - Answer B. Number of days a hospital can cover its daily cash op exp with its cash and investments
Vertical analysis answers which general question? A. What % of one line item is another line item B. What is the % change in a line item from one year to the next C. Which financial statement is best to use in financial decision making D. Which analysis is best to use in financial decision making - Answer A. What % of one line item is another line item
Asset mix strategy - Answer Amt of WC an org keeps LIQUID
Aggressive asset mix-Answer maximize returns by investing excess WC in less liquid assets to have high returns (low liquidity= high risk and agressive)
conservative asset mix - Answer maintain higher liquidity by keeping excess funds in cash and mkt sec = low risk= low return
Compensating balance - Answer Balance of cash u need to keep in account at the bank
Effective int rate formula - Answer (Int exp+ amt borrowed) / (amt borrowed- compensating balance)
Intepret 2/10, net 30; trade credit on AP - Answer 2% discount if paid within 10 days; full amount due in 30 days
transaction notes - Answer ST unsecured bank loan for a purpose -has compensating balance
revenue cycle management steps - Answer ensure timely/accurate cash collection to pmt -scheduling, registration, charge capture, coding, electronic billing, pmt
decentralized collection centers - Answer payors send pmt to local center where they are deposited in provider's local bank
lockboxes - Answer payor sends pmt to PO box; bank then processes pmt for provider -saves on admin costs but bank still charges fee
Invest. $ on ST basis: treasury bill - Ans. gov pays u back quickly; 1000$ T-bill at 1.5% int: -u loan 985$ to govt, and get tot. of 1000$ in a year (0.015x1000=15$)
forecast and cash balance definition -Ans. forecast: imp to identifty the ST cash shortage/surplus cash balance: the amt. Cash available in end of current period sufficient for outflow of next period of forecasting
claim scrubbing and what step is this under - Answer editing function to look for missing/inaccurate info that can slow down the pmt process -electronic billing
Which is NOT a major reason to hold cash? A. Precautionary purposes B. Speculative purposes C. Hedge against inflation D. For daily operation purposes - Answer C. Hedge against inflation
The working capital cycle has 4 phases T or F - Answer T
Finance mix strategy includes A. Placing excess funds in non liquid assets B. Realizing maximum returns from the investment in non liquid assets C. Cash management D. An aggressive asset mix strategy - Answer C. Cash management
Scheduling is NOT a part of the revenue cycle T or F - Answer False; it is apart of it
Primary instruments for a hospital to invest its cash on ST basis are: A. Net assets B. Treasury bills C. Certificates of deposit D. B and C - Answer B and C
-both given values
days in a/r excel formula - Answer net a/r (given) / ave daily pt rev (net pt rev/# days in period)
AR as a % of rev excel formula - Answer net ar / net pt rev -both given values -measures how many days of rev are uncollected
annuity vs perpetuity annuity - Answer a series of equal pmts made at regular intervals -perpetuity: infinite period
Ordinary Annuity vs. Annuity Due and excel function - Answer ordinary= end of month due= beginning of month (earns more $)
Nominal interest rate is: compound rate stated annual interest rate which does not account for compounding within the year discounted rate long-term interest rate - Question asked for annual interest rate which does not consider compounding with in the year
Compound interest method involves: Interest is applied only to the original principle Interest is applied to a dollar on hand today Interest is applied to both original principle and on all interests accumulated since the beginning of period.
All of the Above - Interest is computed on original principle plus all interest earned since the start of interest period.
An effective interest rate is the stated annual interest rate of a loan. True or False? - Answer False (actual int rate not stated)
Future value implies using the compound interest method. True or False? - Answer T
Present value of an annuity refers to: What series of equal payments in the future is worth today taking into account time value of money A factor that when multiplied by a stream of equal payments equals present value What an equal series of payments will be worth at some future date using compound interest None of the Above - Answer What series of equal payments in the future is worth today taking into account time value of money
To find future value one discounts back the stated value. True or False? - Answer F; that is PV
annuity for an infinite period of time is called: long-term annuity simple annuity fixed annuity perpetual annuity - Answer perpetual annuity
Future value is determined using: A compound interest method Using a simple interest method
A capital investment is expected to achieve long-term benefits for the organization that generally fall into three categories: financial benefits, nonfinancial returns and the ability to attract more funds in the future. True or False? - Answer False? Future funding
If the IRR is less than the required return rate, the project should be accepted. True or False? - Answer False
Capital appreciation is:
- The amount of profit the business retains When an investment is valued higher at the time of sale than at the time of purchase **- An increase in liabilities
The payback method measures how long it will take to recover. investment.
- Non -financial © Total @ Past - Initial - Answer Initial
Depreciation expense is removed from cash flow analysis because it is a non-cash expense True or False? - Answer T
Dividends are payments to creditors. True or False? - Answer F; to shareholders
NPV is calculated using ten steps. True or False? - Answer F
Discounted cash flows are adjusted for the cost of capital. True or False? -Answer F; they are computed using the cost of capital as the discount rate
In the capital asset pricing model, if a hospital management company has a "beta" of 2 it means A. Company's stock is two times as more risky than the market in general
**- B. Company's stock is half as risky as the market in general
The exact cost of capital is —— - to determine Difficult Easy ® Not important
- Impossible - Answer Difficult
The strength(s) of the NPV analysis are: Answers in dollars, not years Accounts for all cash flows in the project Discounts at the cost of capital Al of the above - Answer All
Salvage value is the amount of cash to be received when an asset is sold, usually at the end of its useful life. True or False? - Answer T
The cost of capital is the weighted average of the cost of.
- Just debt ® Just stocks
Incremental costs are always unforeseen. True or False? - Answer F; they can be calculated
Additional costs incurred solely as a result of an action or activity or a particular set of actions or activities are
- Incredible costs Incremental costs **- Incurred costs
Fixed costs on a per unit basis decrease as a result of increase volume. True or False? - Answer T; cost is more spread out per pt
An avoidable fixed costs is a fixed costs that will be avoided if service remains. True or False? - Answer F; if the service is discontinued non-avoidable fixed costs will when service is discontinued. decrease remain the same
**- increase
Common costs benefit Nobody
**- Nobody
Total Revenues can be calculated using the formula: Total Revenues = Price x
**- Quantified
Variable costs vary per unit over the relevant range. True or False? - Answer False; unit stays the same
Total contribution margin is total revenues - Total variable costs
**- Total fixed costs
In healthcare, target costing usually involves the provider as the price setter and the government as the price taker. True or False? - Answer F; opposite
Short-term plans primarily include:
**- Production