1. Which of the following items are part of a business’s set of financial statements?
a. Income statement
b. Balance sheet
c. Statement of cash flows
d. Both a. and b. above
e. a., b., and c. above
Answer: _____
2. True or False: The requirement to provide financial accounting information is driven by the need for outside stakeholders (primarily investors) to have reliable information about the financial status of an organization.
a. True
b. False
Answer: _____
3. True or False: The set of rules and regulations that govern the content and format of financial statements is called Government Acceptable Procedures (GAP).
a. True
b. False
Answer: _____
4. Which of the following statements about cash versus accrual accounting is most correct?
a. In cash accounting, an event is recognized when a cash transaction occurs.
b. In accrual accounting, an event is recognized when a cash transaction occurs.
c. Most large healthcare organizations use cash accounting.
d. Most small healthcare organizations use accrual accounting because it closely matches statements required for income tax purposes.
e. In cash accounting, an event is recognized when the obligation for a cash transaction is created.
Answer: _____
5. Which of the following statements about the income statement is most correct?
a. It has several alternative names, including the statement of liabilities.
b. It reports the financial status of an organization as of a single point in time.
c. It reports the economic profitability of an organization.
d. Its three major sections are operating costs, nonoperating costs, and total (net) costs.
e. Income statements are always prepared annually, but never for shorter periods (for example, quarterly).
Answer: _____
6. Which of the following statements about gross and net patient service revenue is most correct?
a. Gross revenue reports revenue based on chargemaster prices.
b. Net revenue is gross revenue less discounts and charity care.
c. Net revenue is gross revenue less discounts, charity care, and bad debt losses.
d. Both a. and b. above are correct.
e. Both a. and c. above are correct.
Answer: _____
7. True or False: Under accrual accounting, all revenues reported on the income statement represent cash collections.
a. True
b. False
Answer: _____
8. True or False: Under accrual accounting, all expenses reported on the income statement represent cash costs.
a. True
b. False
Answer: _____
9. Which of the following statements about income statement expenses is most correct?
a. Supplies are expensed (shown) on the income statement when purchased.
b. Supplies are expensed (shown) on the income statement when consumed (used to provide patient services).
c. All lease expense is reported on the income statement.
d. Both a. and c. above are correct.
e. Both b. and c. above are correct.
Answer: _____
10. Which of the following statements concerning depreciation expense is most correct?
a. Depreciation expense accounts for the loss of value of inventory.
b. Depreciation expense accounts for the loss of value of securities investments.
c. Depreciation expense accounts for the loss of value of fixed assets (plant and equipment).
d. For accounting purposes, depreciation expense is calculated by the double declining balance method.
e. For accounting purposes, depreciation expense is calculated by the triple declining balance method.
Answer: _____
11. Which of the following statements concerning net income is most correct?
a. Net income is the “bottom line” of the income statement.
b. Net income measures total profitability as defined by accounting rules and regulations.
c. In not-for-profit businesses, the entire amount of net income is reinvested in the business.
d. Both a. and b. above are correct.
e. a., b., and c. above are correct.
Answer: _____
12. Which of the following statements concerning net income versus cash flow is most correct?
a. Net income is a rough measure of a business’s cash flow.
b. Net income can be converted into a rough measure of cash flow by adding noncash expenses, typically depreciation.
c. Net income can be converted into a rough measure of cash flow by adding nonoperating income.
d. Net income can be converted into a rough measure of cash flow by adding the provision for bad debts.
e. None of the above statements are correct.
Answer: _____
13. Which of the following statements about the organization of the balance sheet is most correct?
a. The balance sheet has upper and lower (or left and right) sections.
b. Assets are divided into current and long-term categories.
c. Assets are divided into equity and non-equity categories.
d. Both a. and b. above are correct.
e. Both a. and c. above are correct.
Answer: _____
14. True or False: Like the income statement, the balance sheet reports the assets and liabilities of an organization over some period of time.
a. True
b. False
Answer: _____
15. Which of the following equations best describes the accounting identity?
a. Long-term assets = Short-term assets + Equity.
b. Assets = Liabilities + Equity.
c. Total claims = Liabilities + Equity.
d. Short-term assets = Cash + Receivables.
e. Long-term liabilities = Notes + Bonds.
Answer: _____
16. Which of the following statements about the balance sheet is most correct?
a. The lower (right-hand) section reports cash and other assets.
b. The balance sheet reports on a business’s operations.
c. The asset side of the balance sheet is listed in decreasing order of maturity (i.e., longer maturity assets are listed first).
d. The upper (left-hand) section reports liabilities and equity.
e. None of the above statements are correct.
Answer: _____
17. Assume that the value of diagnostic equipment suddenly falls because of technological obsolescence. How is the balance sheet adjusted to preserve the accounting identity?
a. Short-term liabilities are reduced.
b. Long-term liabilities are reduced.
c. Equity is reduced.
d. Inventories are reduced.
e. Cash is reduced.
Answer: _____
18. Which of the following statements concerning accumulated depreciation is most correct?
a. Accumulated depreciation is an income statement item.
b. There is no relationship between depreciation expense on the income statement and accumulated depreciation on the balance sheet.
c. Net fixed assets is equal to gross fixed assets plus accumulated depreciation.
d. Accumulated depreciation appears on the balance sheet under the category “Other Assets.”
e. None of the above statements is correct.
Answer: _____
19. Which of the following statements concerning the statement of cash flows is most correct?
a. Like the balance sheet, the statement of cash flows is as of a single point in time.
b. The statement of cash flows uses information from both the income statement and the balance sheet.
c. The statement of cash flows has five major sections.
d. The most important line on the statement of cash flows is the “bottom line,” the net increase (decrease) in cash.
e. None of the above statements is correct.
Answer: _____
20. Assume that a business’s balance sheet reports total assets of $500,000 and total liabilities of $300,000. Now assume that $20,000 of net fixed assets (net plant and equipment) are written off due to technological obsolescence. All else the same, what is the total equity of the business after the write-off?
a. $200,000
b. $190,000
c. $180,000
d. $170,000
e. There is insufficient information given to answer this question.
Answer: _____
21. Consider the following balance sheet:
Cash $ 70,000Accounts payable $ 30,000
Accounts receivable 30,000Long-term debt 20,000
Inventories 50,000Common stock 200,000
Net fixed assets 350,000Retained earnings 250,000
Total assets $500,000Total claims $500,000
Which of the following statements is most correct?
a. The business is not-for-profit.
b. The business, in the aggregate over time, has been profitable.
c. The business is probably using too much debt financing.
d. The business has $450,000 in its equity accounts (common stock and retained earnings); thus, it has this much money available to spend on new facilities.
e. The business has a short-term bank loan outstanding.
Answer: _____
22. Consider the following balance sheet:
Cash $ 70,000Accounts payable $ 30,000
Accounts receivable 30,000Long-term debt 20,000
Inventories 50,000Common stock 200,000
Net fixed assets 350,000Retained earnings 250,000
Total assets $500,000Total claims $500,000
Assume that the business uses $10,000 of its cash to pay for supplies that were ordered on credit terms and have already been received and booked (recorded on the balance sheet). Which of the below statements reflects the resulting balance sheet change?
a. There is a change to the left-hand side only.
b. There is a change to the right-hand side only.
c. The cash account decreases by $10,000 and the retained earnings account decreases by $10,000.
d. The cash account decreases by $10,000 and the accounts payable account decreases by $10,000.
e. The cash account decreases by $10,000 and the supplies account increases by $10,000.
Answer: _____
23. Consider the following balance sheet:
Cash $ 70,000Accounts payable $ 30,000
Accounts receivable 30,000Long-term debt 20,000
Inventories 50,000Common stock 200,000
Net fixed assets 350,000Retained earnings 250,000
Total assets $500,000Total claims $500,000
Assume that the business uses $30,000 of its cash to pay salaries. Which of the below statements reflects the resulting balance sheet change?
a. There is a change to the left-hand side only.
b. There is a change to the right-hand side only.
c. The cash account decreases by $30,000 and the retained earnings account is reduced by $30,000.
d. The cash account decreases by $30,000 and the long-term debt account is reduced by $30,000.
e. The company does not have the ability to pay $30,000 in salaries.
Answer: _____
24. True or False: Fund accounting is used by investor-owned (for-profit) businesses to differentiate between operating funds and retirement funds.
a. True
b. False
Answer: _____
25. Which of the following statements about financial condition analysis is most correct?
a. Financial condition analysis focuses on whether or not an organization has the financial capacity to accomplish its mission.
b. Financial condition analysis often results in a list of financial strengths and weaknesses.
c. Financial statement analysis uses data contained in an organization’s financial statements to assess financial condition.
d. Operating analysis uses operating data to explain financial condition.
e. All of the above statements are correct.
Answer: _____
26. True or False: In ratio analysis, a single value has little meaning. Therefore analysts use trend and comparative analyses to help “interpret the numbers.”
a. True
b. False
Answer: _____
27. True or False: The primary difference between financial statement analysis and operating analysis is that operating analysis does not use benchmarking while financial statement analysis does.
a. True
b. False
Answer: _____
28. Which of the following statements about financial statement analysis is most correct?
a. The current ratio measures liquidity.
b. Du Pont analysis is based on the fact that return on equity (ROE) can be expressed as the sum of three other ratios (Ratio 1 + Ratio 2 + Ratio 3).
c. It is relatively easy to interpret a ratio in the absence of comparative and trend data.
d. Both a. and b. above are correct.
e. a., b., and c. above are correct.
Answer: _____
29. True or False: To create common size financial statements, all income statement items and balance sheet accounts are divided by total assets.
a. True
b. False
Answer: _____
30. Which of the following statements about the limitations of financial condition analysis is most correct?
a. Comparison with industry averages is difficult if the organization operates in several different lines of business.
b. Seasonal factors can distort ratios.
c. Inflation effects can distort ratios.
d. Both a. and b. above are correct.
e. a., b., and c. above are correct.
Answer: _____
31. KPI stands for:
a. Kerrigan patient index
b. Key patient income
c. Key performance indicator
d. Key person insurance
e. Known performance index
Answer: _____
32. True or False: It is always quite easy to determine whether a given ratio value is “good” or “bad.”
a. True
b. False
Answer: _____
33. Suppose that two hospitals are identical in all ways except that Hospital N is relatively new while Hospital O is relatively old. Which of the following statements about a comparative financial statement analysis is most correct? (Hint: Think about the differences in the amount of net fixed assets carried on the balance sheet and the amount of depreciation expense reported on the income statement.)
a. Hospital N will report the higher net income.
b. Hospital N will have the higher total asset turnover.
c. Hospital N will have the higher fixed asset turnover.
d. Hospital N will have the lower gross fixed assets.
e. None of the above statements are correct.
Answer: _____
34. Grady Home Health has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000 and total assets of $22,500,000, what is Grady’s return on assets (ROA)?
a. 13.3%
b. 10.9%
c. 8.0%
d. 5.3%
e. 3.1%
Answer: _____
35. A fire has destroyed a large percentage of the financial records of the Carter Health System. You have the task of piecing together information to prepare a financial report. You have found the profit margin to be 5.4 percent. If sales were $4 million on total assets of $2 million, and the amount of debt financing was $800,000, what was Carter’s return on equity (ROE)? (Hint: Use the Du Pont equation to answer this question.)
a. 13.8%
b. 18.0%
c. 19.2%
d. 21.6%
e. 25.8%
Answer: _____
36. White Memorial Hospital has a debt-to-equity ratio of 0.67. What is the hospital’s debt ratio?
a. 10%
b. 20%
c. 30%
d. 40%
e. 50%
Answer: _____
37. Which of the following are basic sources (forms) of capital?
a. Debt
b. Equity
c. Leases
d. Convertible bonds
e. Both a. and b. above
Answer: _____
38. The cost of debt capital to a business is measured by the:
a. Maturity date
b. Interest rate
c. Amount borrowed
d. Cost of equity
e. None of the above
Answer: _____
39. True or False: Although many factors influence the interest rate set on a loan, the two most important are risk and inflation.
a. True
b. False
Answer: _____
40. True or False: Long-term debt is defined as having a maturity of more than six months.
a. True
b. False
Answer: _____
41. Which of the following statements about short-term debt is most correct?
a. Short-term debt has higher issuance costs than long-term debt.
b. Short-term debt has more restrictions (restrictive covenants) than long-term debt.
c. Short-term debt generally has a lower cost than long-term debt.
d. Most short term debt is obtained by issuing bonds to individuals
e. All of the above statements are correct.
Answer: _____
42. True or False: Municipal bonds are essentially the same as corporate bonds. Thus, the coupon (interest) rate set on a not-for-profit hospital bond will be the same (for all practical purposes) as the rate set on a similar for-profit hospital bond.
a. True
b. False
Answer: _____
43. Which of the following statements about debt contracts is most correct?
a. Debt contracts have several different names.
b. Debt contracts typically contain restrictive covenants.
c. All debt contracts name a trustee.
d. Both a. and b. above are correct.
e. a., b., and c. above are all correct.
Answer: _____
44. True or False: A call provision allows bondholders to tender (turn in) their bonds at any time and receive the principal amount in return.
a. True
b. False
Answer: _____
45. Which of the following statements about debt ratings is most correct?
a. The ratings reflect the probability of default.
b. The ratings on outstanding debt are automatically reviewed and updated annually.
c. The ratings are important to investors, but unimportant to issuers.
d. The ratings are based solely on a quantitative analysis of the issuer’s financial condition.
e. The ratings run from A (for the best) to F (for the worst).
Answer: _____
46. Which of the following statements about common stock is incorrect?
a. The pre-emptive right gives current stockholders the right to purchase any new shares issued by the company.
b. Stockholders exercise control over the company by voting for board members.
c. Common stockholders are the owners of for-profit corporations.
d. The claim of shareholders on the cash flows of the firm is limited to the dividends that they receive, i.e., they have no claim on a business’s residual earnings.
e. In the event of bankruptcy and liquidation, shareholders often receive nothing.
Answer: _____
47. True or False: Although the use of financial leverage (debt financing) can increase the return to the owners of a business, it also increases the riskiness of their equity investment.
a. True
b. False
Answer: _____
48. Which of the following statements about the use of debt financing (financial leverage) is incorrect?
a. In most situations, the use of debt financing increases the return to owners (say, as measured by ROE).
b. In all situations, the use of debt financing increases the riskiness to owners.
c. Capital structure theory allows managers to precisely determine the optimal capital structure for any for-profit business.
d. Debt financing allows more of a business’s operating income to flow through to investors.
e. Because debt financing “levers up” (increases) owners’ returns, its use is called financial leverage.
Answer: _____
49. Which of the following statements about the tradeoff theory of capital structure is most correct?
a. The trade-off theory can be used to set a precise optimal structure for any given business.
b. The trade-off theory tells us that businesses should use almost 100 percent debt financing.
c. The trade-off theory tells us that businesses should use almost no debt financing.
d. The trade-off theory tells us that businesses should use some debt financing, but not too much.
e. The trade-off theory has no applicability at all to not-for-profit businesses.
Answer: _____
50. Which of the following factors influence the estimate of a business’s optimal capital structure?
a. The amount of business (inherent) risk
b. Lender/rating agency attitudes
c. Industry averages
d. The need to maintain financial flexibility (reserve borrowing capacity)
e. All of the above factors influence the estimate
Answer: _____
51. True or False: To minimize the risk associated with debt financing, permanent assets (land, buildings, and equipment) should be financed with long-term debt while temporary assets (such as a seasonal buildup in inventories) should be financed with short-term debt.
a. True
b. False
Answer: _____
52. True or False: The corporate cost of capital is a blend (weighted average) of the costs of all of a business’s financing sources.
a. True
b. False
Answer: _____
53. Which of the following statements about cost of capital estimation is most correct?
a. In general, at least five methods will be used to estimate the cost of debt.
b. The corporate cost of capital is the higher of either the cost of equity or the cost of debt.
c. The corporate cost of capital is used as the hurdle (discount) rate for all projects being evaluated in the organization.
d. Because there is no tax savings associated with debt issued by not-for-profit organizations, it is theoretically wrong to recognize the savings for investor-owned businesses.
e. None of the above statements are correct.
Answer: _____
54. Which of the following statements regarding the cost of equity is most correct?
a. The cost of debt is the interest rate set on debt financing, while the cost of equity is defined similarly; it is the rate of return required by equity investors.
b. The debt cost plus risk premium method is one way to estimate the cost of equity.
c. The cost of equity for a not-for-profit business is zero.
d. Both a. and b. above are correct.
e. a., b., and c. above are correct.
Answer: _____
55. True or False: The corporate cost of capital provides a benchmark for determining a project’s cost of capital. In general, projects that are riskier than average must have a cost of capital that is higher than the corporate cost of capital, while projects that are less risky than average must have a cost of capital that is less than the corporate cost of capital.
a. True
b. False
Answer: _____
56. Generic Health Services has a target capital structure of 30 percent debt and 70 percent equity. Its cost of debt estimate is 10 percent and its cost of equity estimate is 16 percent. It pays federal, state, and local taxes at a 40 percent marginal rate. What is the firm’s corporate cost of capital?
a. 6.0%
b. 10.0%
c. 13.0%
d. 14.2%
e. 16.0%
Answer: _____