Question 1

All three kinds of organizations may be health care providers-private or investor-owned hospitals, governmental hospitals, or nonprofit.

Accepted Answer

Health care organizations may be organized as nonprofit, governmental, or private for-profit (investor-owned) entities.

Question 2

Nonprofit and investor-owned hospitals follow Financial Accounting Standards Board standards while governmental hospitals are required to follow standards issued by the Governmental Accounting Standards Board.

Accepted Answer

The Financial Accounting Standards Board (FASB) establishes accounting standards for for-profit (investor-owned) and nonprofit hospitals and other health care entities. The Governmental Accounting Standards Board (GASB) establishes them for governmental hospitals and other health care entities.

Question 3

Financial reporting by nonprofit hospitals focuses on three classes of net assets-restricted, unrestricted, and endowments.

Accepted Answer

Like all nonprofit entities, nonprofit hospitals are required to report net assets and changes in net assets in one of two classes-net assets with donor restrictions or net assets without donor restrictions.

Question 4

Nonprofit hospitals provide two operating statements-one a typical operating statement reports only on unrestricted net assets, the other reports changes in the two required net asset classes.

Accepted Answer

In effect, nonprofit hospitals present two operating statements. One, the statement of operations, reports on the basic day-to-day revenues and all expenses by presenting only changes in net assets without donor restrictions. The other statement, called the statement of changes in net assets, reports changes in the required two net asset classifications as well as changes in net assets for the hospital as a whole.

Question 5

Governmental hospitals that meet the definition of an enterprise fund must present four financial statements-a statement of position, a statement of changes in net position, a statement of changes in cash flows, and a budgetary comparison statement.

Accepted Answer

The GASB requires governmental hospitals to present three statements-a statement of net position, a statement of changes in net position, and a statement of cash flows. Only a government's General Fund and major Special Revenue Funds that have a legally adopted budget are required to present a budgetary comparison statement.

Question 6

Hospitals sometimes work with third-party payers who pay an interim rate based on a percentage of the hospital's established rates but also have the right to adjust their payments later-or retrospectively.

Accepted Answer

Third-party payers that pay hospitals retrospectively reimburse hospitals initially on the basis of interim payment rates. The interim payment rates are then adjusted retrospectively based on stipulated allowable costs after the hospitals submit required cost reports to the third-party payers.

Question 7

Nonprofit hospitals must base all their patient service revenue recognition on contracts with patients, whether those contracts are written or unwritten.

Accepted Answer

Nonprofit hospital patient service revenue recognition is based on a written or unwritten contract with a customer.

Question 8

Nonprofit hospitals recognize patient service revenue at their gross (established) rates, even though they don't expect to be able to collect those amounts.

Accepted Answer

For nonprofit hospitals, patient service revenue is recognized based on each contract's transaction price-the estimated amount of consideration a nonprofit hospital believes to be probable of receipt.

Question 9

Once a governmental or nonprofit hospital decides that its patient meets the definition of a charity care case, they are no longer permitted to report the fees that are charged for the services provided to that patient as revenue.

Accepted Answer

Nonprofit and governmental hospitals are prohibited from reporting receivables or revenues from services that have been identified as charity care in their financial statements. Instead specific disclosures are required.

Question 10

Hospitals that enter into capitation fee agreements, such as with HMOs, recognize patient service revenues in the same manner (giving consideration to contractual and implied concessions) as for all other patient service revenues.

Accepted Answer

Hospitals that enter into capitation agreements with various HMOs receive agreed-upon premiums per member, per month, regardless of the actual services they perform for each patient. The revenue is earned by agreeing to provide care.

Question 11

When a governmental hospital receives donations of supplies, such as of syringes, it should recognize contribution revenue equal to the amount the contributor paid for the supplies.

Accepted Answer

A governmental hospital should recognize the fair value of donated commodities as revenue in the period when all eligibility requirements are met, which is usually in the period when the commodities are received.

Question 12

When a donor contributes cash with "no strings attached," this means the hospital should report the contribution as revenue right away.

Accepted Answer

Both nonprofit and governmental hospitals would report unrestricted donations as revenues or gains on receipt of the contributions.

Question 13

If a dietician in the community donates her time to the local nonprofit hospital to help it create better menus for its food service, that nonprofit hospital should report her services as contributed services revenue equal to the fair value of her services and the same amount as an expense.

Accepted Answer

If contributed services require specialized skills, are provided by individuals who possess those skills, and would need to be purchased if not contributed, nonprofit hospitals need to record their fair value as revenues and expenses.

Question 14

Some nonprofits hospitals report "assets limited as to use" when specific resources are restricted by a contract (such as with a lender) or when the nonprofit's governing body has set aside resources for a specific purpose.

Accepted Answer

"Assets restricted as to use" are designations of unrestricted resources of a nonprofit hospital that have been set aside either as a result of a contractual agreement with an external party other than a donor or as a result of an internal decision by a hospital's governing board.

Question 15

Nonprofit hospitals may receive a variety of contributions that impose donor restrictions, including limitations on the period during which the hospital may use the resources.

Accepted Answer

Donor-imposed restrictions affect the purposes for which nonprofits may spend the donated resources, when they may spend them, and even whether they may spend them.

Question 16

When governmental hospitals receive contributions that include eligibility requirements, the hospital only recognizes revenue when it has met those eligibility requirements. If the government receives cash, it reports the cash as a liability until the eligibility requirements are met.

Accepted Answer

Contributions to governmental hospitals that include eligibility requirements are not recognized until those requirements are met. If contributions are received before a government meets eligibility requirements, the resources are reported as liabilities.

Question 17

Both governmental and nonprofit hospitals must report their investments in debt and equity securities at their fair value.

Accepted Answer

In general, both governmental and nonprofit hospitals report investments in equity and debt securities at fair value on the balance sheet.

Question 18

Both governmental and nonprofit hospitals must report a liability for medical malpractice claims once it is probable that the claim will have to be paid and the amount is known.

Accepted Answer

Expenses for medical malpractice claims must be recognized and liabilities reported if it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.

Question 19

When a governmental hospital that meets the definition of an enterprise fund purchases a building, it must report the entire cost of the building as a capital expenditure.

Accepted Answer

Because full accrual accounting is used for governmental hospitals that meet the definition of an enterprise fund, items of property, plant, and equipment are recorded as assets when acquired and are depreciated over their useful lives.

Question 20

Both governmental and nonprofit hospitals are required to be present a statement of cash flows, but the statements presented for nonprofit hospitals are different from those presented by governmental hospitals.

Accepted Answer

Because of differences in the standards adopted by the FASB and the GASB, several major differences can be found in the details of these cash flow statements, including the use of the indirect method by nonprofits, the use of four cash flows categories by governmental hospitals and three by nonprofit hospitals.

Quiz 14: Accounting for Health Care Organizations