CHL Financial Planning and Budgeting 2 — Questions and Answers
Question 1: A healthcare organization uses a rolling budget approach. What is the primary advantage of this method over a static annual budget?
- It eliminates the need for variance analysis
- It continuously updates forecasts as new periods are added (Correct answer)
- It requires less administrative time to maintain
- It locks in spending commitments for the full fiscal year
Correct answer: It continuously updates forecasts as new periods are added
Rolling budgets are continuously updated by adding a new period as the most recent period ends, keeping the forecast horizon constant and improving accuracy.
Question 2: Which financial metric best measures a hospital's ability to service its long-term debt obligations?
- Current ratio
- Days cash on hand
- Debt service coverage ratio (Correct answer)
- Operating margin
Correct answer: Debt service coverage ratio
The debt service coverage ratio measures net income available relative to total debt service payments, indicating the organization's capacity to meet long-term debt obligations.
Question 3: A CHL is preparing a capital budget request for a new MRI machine. Which cost should be included in the capital budget rather than the operating budget?
- Annual maintenance contract fee
- MRI technologist salary
- Purchase price and installation costs (Correct answer)
- Contrast media and supplies
Correct answer: Purchase price and installation costs
Capital budgets include major asset acquisitions and their associated installation costs, while recurring operational expenses belong in the operating budget.
Question 4: What does a negative operating margin indicate for a healthcare organization?
- The organization is generating surplus revenue from investments
- Operating expenses exceed patient care revenues (Correct answer)
- The organization has insufficient working capital
- Non-operating income is offsetting operating losses
Correct answer: Operating expenses exceed patient care revenues
A negative operating margin means that the costs of delivering care and running operations exceed the revenues generated from those activities.
Question 5: In healthcare budgeting, what is 'flex budgeting' designed to address?
- Unexpected capital expenditures mid-year
- Variations in volume that affect both revenues and variable costs (Correct answer)
- Changes in payer mix throughout the fiscal year
- Executive discretionary spending needs
Correct answer: Variations in volume that affect both revenues and variable costs
Flex budgeting adjusts budgeted amounts based on actual volume, allowing fair comparison of actual versus expected costs at the realized activity level.
Question 6: A healthcare leader reviews a report showing days in accounts receivable (AR) increased from 45 to 62 days. What is the most likely financial impact?
- Improved cash flow and increased liquidity
- Reduced need for short-term borrowing
- Decreased cash flow and potential liquidity strain (Correct answer)
- Higher net patient revenue on the income statement
Correct answer: Decreased cash flow and potential liquidity strain
Increasing days in AR means the organization is collecting payments more slowly, which ties up cash and can strain liquidity and operations.
Question 7: Which budgeting approach requires each department to justify every expense from zero rather than basing the budget on the prior year's figures?
- Incremental budgeting
- Performance-based budgeting
- Zero-based budgeting (Correct answer)
- Activity-based budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting requires managers to build their budget from scratch each cycle, justifying all expenditures regardless of historical spending levels.
CHL Financial Planning and Budgeting 2
A healthcare organization uses a rolling budget approach.
What is the primary advantage of this method over a static annual budget?