HAC Healthcare Accounting Financial Reporting & Analysis 3 — Questions and Answers
Question 1: ASU 2014-09 (ASC 606) changed healthcare revenue recognition primarily by requiring hospitals to:
- Record revenue only when cash is received
- Estimate the transaction price including variable consideration at contract inception (Correct answer)
- Eliminate the concept of contractual adjustments entirely
- Report net patient revenue at gross charges only
Correct answer: Estimate the transaction price including variable consideration at contract inception
ASC 606 requires healthcare entities to estimate variable consideration (including contractual adjustments and implicit price concessions) at contract inception to determine the transaction price.
Question 2: Which of the following is classified as a non-operating revenue item on a hospital's income statement?
- Cafeteria sales
- Investment income on an endowment fund (Correct answer)
- Outpatient pharmacy revenue
- Research grant revenue from operations
Correct answer: Investment income on an endowment fund
Investment income on endowment funds is a non-operating revenue item because it arises from financial activities rather than the hospital's core healthcare delivery operations.
Question 3: In a hospital's statement of cash flows using the indirect method, depreciation is added back to net income because:
- It increases tax liability
- It is a non-cash expense that reduced net income but did not use cash (Correct answer)
- It represents a capital expenditure
- It increases accounts receivable
Correct answer: It is a non-cash expense that reduced net income but did not use cash
Depreciation is a non-cash expense; it reduces net income on the income statement but involves no cash outflow, so it must be added back under the indirect method.
Question 4: A hospital reports $50M in gross patient revenue, $20M in contractual adjustments, and $2M in charity care. Net patient service revenue is:
- $50M
- $30M
- $28M (Correct answer)
- $48M
Correct answer: $28M
Net patient service revenue equals gross charges minus contractual adjustments minus charity care: $50M - $20M - $2M = $28M.
Question 5: The 'cushion ratio' in healthcare financial analysis measures:
- Current assets relative to current liabilities
- Unrestricted cash and investments relative to annual debt service (Correct answer)
- Operating margin relative to total debt
- Days in accounts receivable relative to payer mix
Correct answer: Unrestricted cash and investments relative to annual debt service
The cushion ratio equals unrestricted cash, investments, and board-designated funds divided by maximum annual debt service, indicating how many times liquid assets cover debt obligations.
Question 6: Under FASB ASC 958-605, donor-restricted contributions received by a not-for-profit hospital are initially recorded as:
- Revenue with donor restrictions (Correct answer)
- Liability until the restriction is met
- Non-operating revenue without restrictions
- Deferred revenue on the balance sheet
Correct answer: Revenue with donor restrictions
Under ASC 958-605, donor-restricted contributions are recognized as revenue with donor restrictions when received, not held as liabilities.
Question 7: Which metric best evaluates a healthcare organization's liquidity position for short-term obligations?
- Debt-to-equity ratio
- Days cash on hand (Correct answer)
- Return on assets
- Long-term debt to capitalization
Correct answer: Days cash on hand
Days cash on hand measures how many days of operating expenses can be covered by unrestricted cash and equivalents, directly assessing short-term liquidity.
HAC Healthcare Accounting Financial Reporting & Analysis 3
ASU 2014-09 (ASC 606) changed healthcare revenue recognition primarily by requiring hospitals to: