53) For each of the following definitions, indicate the key term from the list that best matches by
placing the appropriate definition.
A. Contractual adjustments
B. Capitation fees
C. Charity care
D. Diagnosis-related groups
E. Prospective payment system
F. Health maintenance organizations
G. Performance indicator
H. Third-party payor
________ 1. A prepaid health care plan that functions as a broker of health care between the
consumer/patient requiring services and the health care provider
________ 2. Medicare’s system in which payments are based on allowed service costs within the
same diagnosis-related group rather than on actual cost of services rendered
________ 3. Fixed dollar amount of fees per person paid periodically by a third-party payor to a
health care provider
________ 4. The difference between the gross patient service revenue and the negotiated payment
by
third-party payors in arriving at net patient service revenue
________ 5. Health services provided to persons with a demonstrated inability to pay
54) Record in general journal form the following selected transactions for Avalon General
Hospital, a nongovernmental not-for-profit institution. (If no entry is required for a
transaction/event, select “No Journal Entry Required” in the first account field.)
1. Gross charges for patient services rendered during the period amounted to $7,870,000, of which
$350,000 represented charity care for indigent patients.
2. During the year the provision for bad debts was set at $190,000 and contractual adjustments
amounted to $435,000.
3. A wealthy donor donated $2,000,000 to construct a new cardiology wing on the hospital.
4. During the year, the new cardiology wing (see item 3) was one-half completed at a cost of
$1,000,000.
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55) Prepare general journal form for the following transactions of Bothwell Regional Hospital, a
nongovernmental not-for-profit hospital. (If no entry is required for a transaction/event, select
“No Journal Entry Required” in the first account field.)
1. For the month just ended the hospital received in cash $8,000 from the hospital’s gift shop sales,
and received donated medicines with a fair value of $47,000. These medicines are of the type the
hospital normally would purchase.
2. The hospital’s finance officer, in compliance with the directive of the governing board, invested
$600,000 of operating cash in certificates of deposit to be held for future purchases of equipment.
3. New equipment costing $750,000 was purchased from money given to the hospital by a donor in
a prior year to be held until needed for equipment purchases.
4. A federal grant was received in cash in the amount of $400,000 to be used for heart research.
During the current year only $50,000 was spent for this research program.
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No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer:
Explanation: No further explanation details are available for this problem.
Difficulty: 3 Hard
Topic: Reporting and Accounting Issues
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care
organizations.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: FN Reporting
56) Georgetown Hospital, a governmental hospital, recorded during its fiscal year ended
September 30, gross patient services valued at $15,000,000, excluding charity care services of
$1,600,000. However, contractual adjustments by third-party payors amounted to $1,200,000. In
May of that year it received donated medical supplies worth $2,000; supplies it had planned to
purchase had it not been for the gift. At year-end, the governing board set aside investments in the
amount of $500,000 for future plant expansion and $250,000 to be invested with the related
earnings used for a special prenatal care program.
1. In its operating statement for the year ended September 30, how much should Georgetown
report as net patient services revenue?
2. For the year ended September 30, how should the donation of medical supplies be reported?
3. What amount of unrestricted net position should Georgetown report in its balance sheet as board
designated, assuming it had no board designated net position at the beginning of the year?
Answer: 1. $13,800,000. The $15,000,000 gross patient service revenue must be adjusted for the
57) There are three main reasons why a nongovernmental not-for-profit hospital does not receive
the full amount that it normally charges for a room: (1) contractual adjustments arising from
transactions with third-party payors, (2) charity service provided to indigent patients, and (3) bad
debts. Compare the accounting treatment for the three reasons listed.
24
58) Congress mandated diagnosis-related groups (DRG) as a method for recording costs in health
care organizations, in part to facilitate Medicare’s prospective payment system. Explain what the
DRG system is and describe the impact this change may have had on the cost accounting systems
of health care organizations.
Answer: Diagnosis-related groups (DRGs) is a case-mix classification scheme that is used to
determine the payment provided to the hospital for inpatient services, regardless of how much the
59) Contrast the statement of cash flows that nongovernmental not-for-profit hospitals prepare to
those that government hospitals prepare.
Answer: Not-for-profit hospitals prepare their cash flows statement in conformity with FASB
25
60) Describe what prepaid health care plans are and some of the related accounting issues.
Answer: Health maintenance organizations (HMOs) and preferred provider organizations
(PPOs) function as brokers between the consumer/patient and health care provider. In general, the
61) What auditing issues are of particular significance to the health care industry?
Answer: Auditors must be sure that contingent liabilities (e.g., malpractice lawsuits) are recorded
or disclosed as appropriate. Health care providers may receive federal funds and therefore be
26
62) “The goal of financial and operational analysis for the manager is to determine the
creditworthiness of the health care organization.” Do you agree with the statement? Why or why
not?
Answer: Disagree. A manager certainly cares about the ability of the organization to provide for
debt service; however, that objective is more likely associated with financial analysts who evaluate
63) Explain how one can evaluate both the financial performance of a hospital and the quality of
health care the hospital provides.
Answer: National organizations such as the Healthcare Financial Management Association
(HFMA) publish annual benchmark data for hospital financial indicators. An example of