Assignment: Long-term Obligations

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Assignment: Long-term Obligations

Assignment: Long-term Obligations

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Excess of revenues over expenses Depreciation expense Interest expense Debt principal payment Interest payments

Debt service coverage measures the ability to meet long-term debt obligations. Higher values indicate an organization’s ability to meet long-term debt obligations. Principal payments are found as payments on long-term debt on the statement of cash flows.

• Cash Flow to Debt

Cash flow to debt measures the ability to meet both short-term and long-term obligations. Higher values indicate an organization’s ability to meet both short-term and long-term obligations, and lower values indicate a possible problem in meeting long-term obligations. W. Cleverley, J. Cleverley, and Song (2010) indicate that the cash flow to debt ratio is one of the best predictors of financial failure in organizations.

oPerAtIng IndIcAtors In addition to ratio analysis using information found in the financial statements, manage- ment may also analyze the following operating indicators, which are important measures of financial performance in relation to operations. Operating indicator information is not usually found on the financial statements, but it should be readily available on a variety of reports used by management.

• Average Length of Stay

Patient days Discharges

The average length of stay (ALOS) measures how long patients stay in the hospital on aver- age. Because a high percentage of hospital patients either reimburse the hospital per case or are on a capitated arrangement, lower ALOSes that hold down costs are preferable. However, hospital management should be aware of the incremental costs associated with keeping patients longer before developing rigorous discharge policies to lower their ALOS. Median ALOS for all hospitals reporting to Optum (2017) for 2015 was 4.50. Hospital

management should also be aware that ALOS varies for a variety of reasons, including case mix. Adjusted ALOS usually means that ALOS has been adjusted for case mix. Median ALOS adjusted for case mix for all hospitals reporting to Optum (2017) for 2015 was 2.7.

• Occupancy Rate

Patient days 365 Licensed beds×

Occupancy rate measures capacity, or the percentage of the hospital that is being used. Higher values are typically preferable unless a large portion of the hospital’s business is represented by capitation agreements. The median occupancy rate for all hospitals reporting to Optum (2017) for 2015 was 55.3.

fInAncIAl AnAlysIs And AnnuAl rePorts For-profit organizations prepare annual reports, which include financial and other informa- tion, and send them to their stockholders. Only recently have not-for-profit organizations begun to prepare annual reports as a vehicle of communication and accountability to the community.

There are several principles for preparing good reports, including annual reports:

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