Health Accounting

Chapter 15

Question 1

There are three main steps to be followed in investment analysis. The first one is to point out the investment opportunity. In other words, you identify that investment opportunity you want to engage in. After identifying the opportunity, you might have listed a list of investment opportunities you want to engage in (Sabirov et al., 2021). The second step is now to compare and contrast the potential profit levels of these opportunities, if the investment option you have chosen is very promising in terms of profits, then other options, then you are well to go, but if it ascertains a extremely lower profit level than other investment options, then it will force you to consider another option to avoid incurring losses (Sabirov et al., 2021). The last step in this process is to compare the cost of the investment, to the future cashflows, or rather the potential profits the option will bring upon execution of the investment. Ideally, the profits should be higher than the costs, and if this does not happen, then it is recommendable to consider other options, since the primary goal of investing is to make profits, and not to make losses.

Question 2

False. Investment analysis is not concerned with revenues and expenses, rather, it is concerned with the cash flows, both inflows and outflows in that case. By analyzing the cash inflows and outflows, investment analysts are easily able to predict the potential future performance of an investment, thereby help in choosing the best portfolio to invest in order to avoid incurring losses (Shair et al., 2021).

  1. To determine the better payback period, it is important to determine the payback period for each investment project. Using the formula , the payback period for the first project is 3 years and 2 years for the second project. Thus, the second project has the better payback period. However, this method of analysis disregards the time value of money. In other words, the first project is more profitable than the second project, a fact that the method of analysis ignores.
  2. Explain compounding and discounting

Compounding refers to growth in the value an investment by crediting interest to the initial amount invested (principal) in addition to the interest previously paid. In other words, compounding is interest on the sum of principal and interest paid. On the other hand, discounting is the reverse of compounding – it entails estimating the present value of future cash flow that is to be earned or received at some point in the future.

  1. How much will $6,000 invested at 5% simple interest be worth in 3 years? What will it be worth if the interest rate is 7%?

The value of an investment over a given period using simple interest is computed with the formula . FA is the final amount or the ultimate value of the investment, P is the invested amount or principal, r is the interest rate and t is the time frame. Thus, the final amount with 5% interest rate is:

The final amount is $6,900. With 7% interest rate, the final amount is:

The final amount is $7,260.

  1. Compounded annually, the investment will be:

The final amount is $5,627.54.

If compounded quarterly, the investment will be:

The final amount is $5,636.85,

If the interest rate is 6% and compounded annually:

The final amount is $6,312.50.

Compounded quarterly:

The final amount is $6,353.39.

  1. Let , where FV is the value of the cash flows today, PMT is the $10,000 offered annually, and i is interest and N is the number of years.

The cash flows would be worth $125,778.93 today.

  1. Let the initial investment be $68,000. The payments from the county over the five-year period will be 800 x 15 = $12,000. Subtracting the $3,000 annual maintenance cost leaves WCHC with annual net cash flow of $9,000. Using these figures, the net present value (NPV) of the costs of purchasing and operating the van over the five-year period is:
Year Cash Flow Present Value Factor of Discount Rate (5%) Present Value of Cash Flow
0 -68,000.00 1 -68000
1 9000 0.9524 8571.6
2 9000 0.907 8163
3 9000 0.8638 7774.2
4 9000 0.8227 7404.3
5 9000 0.7835 7051.5
NPV -29035.4

 

The table indicates that the net present value of the costs of purchasing and operating the van for five years will be $(29,035.40). Since the NPV is negative, it means the payments from the county are insufficient. Thus, $29,035.40 must be raised in grants before WCHC purchases the van.

The board’s logic is flawed because it fails to account for the time value of money when comparing the $50,000 expense with the $49,000 income.

To compute the IRR on the investment, assume a discount rate of 5%. The table below presents the computations and indicates that there will be an IRR of 11% on the investment.

Year Cash Flow Factor of the 5% Discount Rate Discounted Cash Inflow
0 -50000 1 7000
1 7000 0.9524 6666.8
2 7000 0.907 6349
3 7000 0.8638 6046.6
4 7000 0.8227 5758.9
5 7000 0.7835 5484.5
6 7000 0.7462 5223.4
7 7000 0.7107 4974.9
Internal rate of return (IRR) 11%

 

  1. Why can the IRR method lead to suboptimal decision-making by organizations?

The IRR may lead to suboptimal decision-making because of the following reasons. First, the method relies on a fixed discount rate while in reality the figure varies from time to time. Secondly, the method is effective in scenarios where the cashflow profile is simple. In other words, the method is ineffective when used in scenarios with multiple negative and positive cash flows. Thirdly, the method fails to provide required results if the discount rate is not specified.

 

Chapter 16

 

Working capital techniques focus specifically on what aspects of an organization’s finances?

            The working capital method is primarily an accounting approach that focuses on maintaining a proper balance between a firm’s liabilities and current assets. A successful functional capital program helps organizations meet their financial responsibilities and increase revenues. Managing working capital entails keeping track of goods, funds, receivables and accounts payable. Main performance metrics, such as the capital ratio, inventory turnover ratio, and ratio analysis, are frequently used in a practical working capital management system to discover sectors that need concentration to preserve profitability and liquidity.

What specific task does a manager undertake when handling working capital issues?

            A manager’s primary focus is often on lowering receivables by enhancing collections from delinquent debtors, analyzing whether inventories are obtained appropriately or purchased in bulk in excess of the demand, and negotiating with suppliers for higher credit terms. The executive ensures that short-term borrowings are reflected by the drawing power available from the company’s existing assets. If there is a shortage in working capital, the manager will concentrate on borrowing long-term money and using them to fill the shortfall with the relevant permissions.

What are the three primary reasons an organization holds cash or cash equivalents

The three main reasons an organization holds cash are for speculative, precautionary, and transactional purposes. Firstly, firms hold funds to discover the opportunity to take full advantage of rare chances that, if acted upon immediately, will benefit them. This is an example of purchasing excess inventory at a discount larger than the carrying costs of retaining the stock. Secondly, keeping cash as a precaution acts as a firm’s emergency reserve. If planned cash inflows are not obtained, expected funds retained on a precautionary premise may be utilized to pay short-term commitments for which the net income may have been budgeted. Lastly, firms exist to generate products or supply services. The provision of services and the creation of products necessitate monetary inflows and outflows. Companies possess funds to meet their income and expenditure outflow requirements. Overall, it is significant for corporations to hold cash equivalents to accomplish these three purposes.

What is the accounts receivable cycle? Why is this task especially important for healthcare organizations?

            The Accounts Receivable (AR) cycle is the amount of money owed to a business for products and services provided or utilized but not yet compensated for by clients. On the income statement, accounts receivable is shown as a current asset. The ratios of accounts receivable to outstanding sales or dates revenue can be used to determine how strong an organization’s AR is. Due to the client’s legal duty to pay the debt, businesses include accounts receivable as assets on their balance sheets. They are regarded as liquid assets since they may be pledged as security against a loan to pay for immediate expenses. The accounts receivable cycle is significant to health organizations since the reimbursements that a hospital or other medical facility receives from patients or their insurance companies are one of its key sources of income. As a result, a hospital can continue to operate and serve more people if it can effectively manage its accounts payable system. The accounts receivable process is vital to healthcare and non-health firms because the funds are categorized as current assets.

What is the goal of EOQ? How does it differ from JIT?

            EOQ’s purpose is to determine the optimum quantity of product units that are supposed to be purchased. A firm’s purchasing, distributing, and warehousing expenses can be reduced if this goal is met. The EOQ formula can be changed to establish alternative production levels and firms with sophisticated supply chains and significant variable expenses generate EOQ using a program in their computer software. EOQ significantly differs from Just In Time (JIT) since inventory is a production technique focusing on producing or procuring items only when needed. The emphasis is primarily on reducing the period between the order date and the time of raw material acquisition. As a result, JIT does not presuppose a constant demand. In retrospect, although these systems significantly differ from each other, they are vital in the management of goods production.

What are the steps in managing the revenue cycle

            The stages of managing the revenue process include pre-authorization, service capture, and claim submission. Pre-authorization is the initial step in revenue cycle management. At this time, a healthcare provider starts gathering the patient’s insurance and financial details. Computerized eligibility validation technologies are now being utilized for provider and patient benefit (Lim et al., 2020). They help the health profession to understand how they will be compensated for certain services. In the second phase of revenue cycle management, a procedure known as charge capture, services supplied are converted into chargeable costs. As the point when a hospital billing code is applied to the request, this revenue management cycle stage is essential to the claim’s procedure. Lastly, the provider payment will be on its way, and the out-of-pocket amount will be displayed for the client to reimburse once the patient’s insurance has approved their claim. Patients may access and pay their invoices in their patient portal with an automated billing system. Overall, these steps are essential in effectively managing a revenue cycle.

Should an organization take a discount of 1.5/10 n/30 on a $ 9,000 invoice or simply pay the bill when due?

            The company should accept the discount. If the firm pays in 10 days (1.5/10) and receives the reduction, it will save $135 ($9,000 x 0.015) for paying 20 days before the deadline. When the payment is paid 20 days later, there will be no savings. However, there will be an expenditure of $135. For example, if a commercial firm obtains short-term financing at a high-interest rate, say 12% per year, or at a monthly interest rate of 1%, the corporation can save much. Consequently, the organization should take the discount to save money, preventing losses.

 

Chapter 17

  1. What is capital structure? Why should healthcare organizations care about it?

The amount of capital backing a business, financing its assets, and supporting its activities is referred to as the capital structure (Wheeler et al., 2000). Additionally, it might display capital expenditures and acquisitions made by a company that may have an impact on the bottom line of the company (Amusawi et al., 2019). Decisions about the capital structure have an impact on the firm’s value and profitability since they raise it due to the present value of tax savings through the usage of debt (Wheeler et al., 2000). This might logically indicate that organizations should employ 100% debt to increase their value (Wheeler et al., 2000). Today, the majority of hospitals, particularly non-profit hospitals, have kept their levels of debt essentially steady.  Consequently, healthcare systems lack simple access to equity. To maintain access to debt markets, healthcare systems’ according to Wheeler et al., (2000), capital structure policies will help the healthcare systems to focus on maintaining high bond ratings and strong investment returns.

  1. What is equity financing in the not-for-profit sector?

Equity financing describes the process by which businesses raise money by selling shares to investors. The fact that the money obtained by the business doesn’t have to be repaid is a benefit of equity financing (Gilchrist et al., 2021). The raised monies are not refunded to shareholders if the business fails. Equity financing for non-profits refers to instances where the company makes money through the stock market and uses that money to donate to causes that advance the welfare of the local populace (What Is Equity Financing, n.d.).

  1. How do investors make money on an organization’s stock?

Dividends and capital growth are the two main ways that stockholders can profit from their investments. Dividends are payments made in cash from a company’s profits (Merritt, 2019). Stockholders will receive $5 for each share they possess if the corporation has 1,000 shares in the hands of “investors” and the corporation announces a $5,000 dividend (Merritt, 2019). The rise in share price is known as capital appreciation. If an organization sells a share to an investor for $10 and the stock goes on to be worth $11, the investor has made a profit of $1 (Merritt, 2019). However, Merritt (2019) continues that that profit only exists on paper and is therefore susceptible to loss unless the shareholder secures it by trading the share.

  1. What is the difference between common and preferred stock?

The distinctions between preferred and ordinary stock are numerous. The fundamental distinction is that stockholders of ordinary stock typically receive one vote per share owned, whereas preferred stock typically does not (Hayes, 2020). More investors are familiar with ordinary stock than preferred stock. Both kinds of stock give investors a stake in a company and can be used as instruments to try to profit from the firm’s potential future achievements (Hayes, 2020).

  1. What is cost of capital?

The minimal rate of returns or profitability that a business must achieve before creating value is known as the cost of capital (Hayes, 2021). The accounting department of an organization computes it to assess financial risk and determine whether an investment is appropriate (Hayes, 2021). Cost of capital is an essential economic and accounting instrument that estimates the costs of investment opportunities and, in doing so, maximizes possible investments (Hayes, 2021). The opportunity cost of investing money in a particular business venture or investment is correlated with the cost of capital.

 

 

 

 

 

 

References

Amusawi, E. G., Almagtome, A. H., & Shaker, A. S. (2019). Impact of lean accounting information on the financial performance of the healthcare institutions: A case study. Journal of Engineering and Applied Sciences14(2), 589-399. https://www.researchgate.net/profile/Ameer-Shaker/publication/337871199_Impact_of_Lean_Accounting_Information_on_the_Financial_performance_of_the_Healthcare_Institutions_A_Case_Study/links/603b78e7299bf1cc26f829ed/Impact-of-Lean-Accounting-Information-on-the-Financial-performance-of-the-Healthcare-Institutions-A-Case-Study.pdf

Gilchrist, D., Etheridge, D., & Liu, Z. F. (2021). Earnings Management in Australian Not-for-Profit Disability Services. Available at SSRN 3864804. https://www.uwa.edu.au/schools/-/media/Not-for-profits-UWA/NFP-Finances/210611-Gilchrist-Etheridge-Liu-Earnings-Management-Working-Paper.pdf

Lim, S. C., Macias, A. J., & Moeller, T. (2020). Intangible assets and capital structure. Journal of Banking & Finance118, 105873. https://doi.org/10.1016/j.iref.2018.10.007

Sabirov, O. S., Berdiyarov, B. T., Yusupov, A. S., Absalamov, A. T., & Berdibekov, A. I. U. (2021). Improving Ways to Increase the Attitude of the Investment Environment. REVISTA GEINTEC-GESTAO INOVACAO E TECNOLOGIAS11(2), 1961-1975. https://revistageintec.net/wp-content/uploads/2022/02/1811.pdf

Shair, F., Shaorong, S., Kamran, H. W., Hussain, M. S., Nawaz, M. A., & Nguyen, V. C. (2021). Assessing the efficiency and total factor productivity growth of the banking industry: do environmental concerns matters? Environmental Science and Pollution Research28(16),

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