Question

Please answer questions 1 and 2 at the bottom.

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Read Case 3, Charitable Contributions and Debt: A Comparison of St. Jude Children's Research Hospital/ALSAC and Universal Health Services in the Mastery of the Financial Accounting Research System (FARS) Through Cases book.

Write a response of 700 to 1,050 words in which you address the following questions from Case 3, Charitable Contributions and Debt: A Comparison of St. Jude Children's Research Hospital/ALSAC and Universal Health Services:

• Requirement A, 1-4.
• Requirement B, 1-2.
• How would your answers to Requirements A and B differ if the government owned and operated the hospital?

  Requirement B: Revenue Mix (Strategy-Related Considerations)

  The 10-K filing of Universal Health Services, Inc. describes the mix of revenue sources, as depicted in Table 5.3-3.

  Table 5.3-3: Patient Revenue Mix

  	PERCENTAGE OF NET PATIENT REVENUES
  	2000	1999	1998	1997	1996
  N/A-Not available (Source: 10-K filed 3/28/2001)
  Third Party Payors
  Medicare	32.3%	33.5%	34.3%	35.6%	35.6%
  Medicaid	11.5%	12.6%	11.3%	14.5%	15.3%
  Managed Care (HMOs and PPOs)	34.5%	31.5%	27.2%	19.1%	N/A
  Other Sources	21.7%	22.4%	27.2%	30.8%	49.1%
  Total	100%	100%	100%	100%	100%

• 1. How does this revenue mix compare with the revenue blend of the not-for-profit entity, St. Jude Children’s Research Hospital (ALSAC)? Access the latest SEC filing and compare the reported revenue mix; has it changed?
• 2. What does that imply as to the strategies of investor-owned hospitals in managing risk and ensuring adequate capital relative to not-for-profit entities? An opportunity exists to explore the greater social and political questions that are frequently debated about the compatibility of profit-oriented entities and quality of health care, relative to not-for-profit entities. As background, identify what the latest SEC filings report concerning charity care.

Answer 1

1. What is meant by the reference in Table 5.3-1 to an FAS 116 adjustment?

FAS 116 is the primary guidance for recording contribution revenue by not for profit organizations. FAS 116 created new standards to record and presentation of contribution revenue.

The FAS 116 adjustment referenced in table 5.3-1 means that an adjustment is made for pledge receivable and recognition of interest revenues. St Jude’s hospital should credit donation revenue. Due to FAS 116, changes have been made to the accounting procedures for the contributions received by healthcare industries.

FAS 116 is applicable only to contribution revenue and not exchange transactions such as certain grants, service revenue or other non contribution revenue.

2. How are contributions recorded? Is there a distinction between pledges receivable and accounts receivable?

Contributions are recorded when the cash is received and also when pledges are made. Income is recorded immediately when the contributions are made even if it has restrictions .

Pledged receivable is also known as a promise to give on the date of the commitment if it is unconditional. When a donor promise non profit organization to contribute money in the future, such promise is called a pledge. This can be of many types. One can be fulfilled with or without restrictions.

Accounts receivable is the outstanding invoices a company has from its clients. This refers to accounts a business has a right to receive because it has delivered a product or service.

3. Are there circumstances when financial statements can quantify volunteers’ services?

As per the information presented in the case, the value of unpaid volunteers’ services is not recognized in the financial statements of St. Jude Children’s Research Hospital. However there are certain circumstances where volunteers’ services can be quantified on financial statements. As per FAS, Statement No. 116, volunteer time can be quantified on financial statements if the volunteer is performing a special assignment.

4. Can financial statement users of not-for-profit hospitals’ financial statements expect to be fully informed regarding affiliated parties, such as the linkages between St. Jude Children’s Research Hospital, ALSAC, and the foundation cited? Explain.

The financial statement users of not-for-profit hospitals’ financial statements can expect to be fully informed regarding affiliated parties. According to the Securities and Exchange Commission, the Financial Accounting Policies Committee (FAPC) requires users of financial statements to have complete, transparent, and consistent information about a company’s commitments in order to evaluate the firm’s risks and potential future earnings.

Since St. Jude Children’s Hospital is affiliated with ALSAC and other foundations, it is important for the hospital to be able to assess potential risks that could arise from the affiliations.