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Direct Cost
costs directly associated with the production of the good or service in question.
Discount Rate
the interest rate used to reduce a future value to its present value.
Discounted cash flow
the approach to valuation that uses the present values of the org's expected future cash flows.
reducing an expected future amount to its present value.
Dividend discount model
the approach to the valuation of common stock that uses the present value of expected future cash dividends as the basis for value.
Double distribution method
cost allocation method that allocates costs from cost centers to revenue centers with intermediate steps, as in the step-down method, but that does not close cost centers until the second round of cost allocations.
Due diligence
process of determining that the assertions made in financing documents are true and accurate.
Earnings before Interest, Depreciation, and Amortization; a measure of cash flow
Economic order quantity (EOQ)
optimal amount to have on hand after delivery of each new order.
Economies of Scale
reductions in average total cost due to increases in the size of the organization.
Economies of Scope
reductions in the average total cost due to increases in the number of services offered by, and the number of functions performed within, the org.
the degree to which securities' prices reflect available information.
Efficient frontier
the set portfolios representing the highest attainable expected return at all levels of risk and the lowest attainable risks for all given expected returns.
End-of-period assumption
the assumption, on which most tables of present value and future value are based, that cash flows are made or received only at the end of each period of time.
assets invested to provide a cash flow subsidy for the org.
the stable price/quantity relationship toward which any market tends to move.
Equivalent Annual Amount
the annual cash flow, for an annuity, that has the same net PV as that of some project whose anticipated cash flows are not themselves an annuity.
Equivalent annual cost
the annual cash outflow, for an annuity of cash outflows, that has the same PV as that of some cash outflow only project whose anticipated cash outflows are not themselves an annuity.
Expense budget
that component of the budget forecasting expenses for the budget period.
Feasibility study
part of the full disclosure documentation for an issue of hospital revenue bonds; indicated what the bonds would finance, what the level of utilization of the funded project is likely to be, and what the financial statements of the org's with the new project in place.
Federal Open Market Committee
committee of governors of the Federal Reserve System and presidents of regional banks, meeting regularly to determine the need to inject or to withdraw money and credit from the economy.
Federal Reserve System
the central bank of the US; 12 regional banks and Washington headquarters.
Fellow of the Healthcare Financial Management Association (FHFMA)
professional designation, earned through continuing education and examination, signifying a high level of proficiency and experience in the financial management of health care org's.
Financial Accounting
the branch of accounting that deals with recording, summarizing, and reporting the transactions of the org.
Financial Accounting Standards Board (FASB)
group, chartered by the US Congress, charged with developing and publishing the standards under which the accounting reports of corporations are to be constructed.
Financial Engineering
development of securities and contracts that offer unusual cash flow patterns.
Financial Leverage
the use of debt by an org; includes the degree of indebtedness and the degree to which the org. can meet its debt obligations.
Financial Management
the process of selection, financing, and stewardship of the assets of any org.
Financial Market
a set of institutional arrangements for purchase and sale of ST or LT funds.
Financial Planning
process of analyzing financing and investment opportunities, anticipating their consequences, and selecting among them.
Financial Reporting
the process of converting bookkeeping entries into useful financial statements.
Financial Statement Analysis
the study of an org's periodic financial statements in order to diagnose the org's strengths and weaknesses.
Financing cash flow
cash flow associated with payments to the suppliers of capital.
method of valuing inventory that assumes that goods sold are the oldest in stock.
Fixed Budget
an expense budget in which responsibility centers have expenditure targets that do not vary with service volume.
Fixed Cost
cost that does not vary as volume varies.
Flexible Budget
an expense budget in which responsibility centers have expenditure targets that vary with service volume.
Float time
the time that elapses between a payor's writing a check and the time that the associated funds become available to the payee.
explanatory notes attached to financial statements.
Free cash flow
cash flow above that which is necessary to pay debt service obligations and that required to invest in any positive net PV projects.
Full Disclosure
the requirement that financial statements disclose all material information, whether favorable to the org. or not.
Fund Accounting
account method employed in some government-owned and not-for-profit org's to ensure proper stewardship of assets.
Future Value
an amount to be receved in the future; the amount to which some present value would grow if invested at some assumed interest rate for some specified period of time.
General obligation bond
debt obligation issued by a municipal bond authority that is guaranteed by the full faith and credit of that authority.
the rules developed and published by the Financial Accounting Standards Board that govern the recording and summarizing of financial transactions.
Geometric mean
the Nth root of the product of N values.
Going Concern
the accounting convention that requires that all entries be made on the assumption that the org. will contintue to exist beyond the current period.
the accounting entry that records the difference between what was paid to acquire an org. and the value of the assets that the org. showed on its balance sheet prior to the acquisition.
Government Accounting Standards Board (GASB)
group, chatered by the US Congress, charged with developing and publishing the standards under which the accounting reports of units of government and of government-owned org's are to be constructed.
Healthcare Financial Management Association (HFMA)
org. of professionals in health care financial management and accounting.
Historical Costs
the original cost of property, goods, or services without showing market value.
Holding cost
annual cost to hold an item in stock.
Hospital revenue bond
debt obligation issued by municipal bond authority on behalf of government-owned or private not-for-profit health care providers, guaranteed only by the revenues of the entity for which issued.
Income Statement
financial statement showing the org's revenues, expenses, and net income for an accounting period.
Incremental Budgeting
budget process in which the budgets for succeeding budget periods are based on those for earlier budget periods.
Indirect cost
a cost that is not directly associated with the production of the good or service in question.
Initial Cash Outflow
the cash flow required to bring an asset into use.
Insider Trading
securities purchases or sales by corporate officers on the basis of information that is not available to the public, prohibited under US Securities law.
payments made in return for the use of money.
Internal Auditing
branch of accounting activity that provides internal scrutiny of the bookkeeping processes and reporting activities of the org.
Internal Auditor
staff member charged with ensuring that financial records are properly documented and maintained, adhering to GAAP.
Internal Rate of Return
the rate of discount that makes the NPV of an asset or project equal to zero; the rate of return earned by the asset or project.
current asset consisting of items held for resale.
Investment banker
specialist in bringing newly issued securities to market.
entity that accredits hospitals and other health care org's; some third party payments are conditioned by such accreditation.
Joint operating agreement
a contractual agreement in which two or more previously existing org's agree to become subsidiaries of a newly created, mutual parent org.
Joint Venture
cooperative arrangement between two org's, each of which continues to exist as an independent entity.
Journal Entry
the original entry of debit and credit amounts, recording a financial transaction.
Just-in-time inventory management (JIT)
delivery of items occurs at the moment at which they are to be used.
method of valuing inventory that assumes that goods sold are the newest in stock.
Law of one price
two identical items for sale in the same location must sell for the same price; if the prices differ, they must quickly move toward equality.
Least Common Multiple
method of comparing assets and projects of unequal expected lives, considering replications of the projects not for one expected life but for the least common multiple of their lives.
a financial obligation of the org.
Limited Partnership
organizational form combining the limited liability of the corporation with the pass-through of income and tax deductions of the partnership.
Line of Credit
a standby loan; an amount that a borrower can borrow on demand.
Linear Programming
procedure for finding values that maximize a linear function, subject to a set of linear constraints.
in the study of financial statements, ratios that show the ability to meet ST financial obligations out of ST assets.
difference between the insurance premium charged to a client and the client's actuarially expected cost of care.
Lock box service
collection service by a commerical bank; checks are sent to a post office box, the bank retrieves them several times daily and immediately deposits them into the client's account.
Long-term debt to equity
ratio of LT debt to owners' equity.
Managed Care
any of a large variety of arrangements for organizing and financing health care in which the insured individual has an incentive to use the services of a designated PCP and incentives to use the services of those specialists to whom the PCP refers the insured.
Managerial Accounting
branch of accounting responsible for taking information about the costs of doing business from the financial records; also known as the cost accountant.
Mandatory Registration
requirement that securities offered to the public be registered with the US Securities and Exchange Commission and with the state securities commissioners of the states in which they are to be sold.
any set of arrangements for bringing buyers and sellers together to effect transactions.
Market Maker
dealer who maintains an inventory of some security and who stands ready to make purchases for and sales from that inventory.
Market value
the approach to valuation that uses the prices at which comparable organization or assets have recently been sold.
Matching principle
the volume of ST assets should be matched by the volume of ST liabilities.
Maximizing behavior
individuals' attempts to seek the highest wealth possible at the risk levels they have chosen.
combination between two preexisting org's in which a new org. is formed and the two merging org's cease to exist.
Mezzanine financing
ST loan to provide financing until the necessary LT securities can be issued.
Modified accelerated cost recovery system (MACRS)
method of accelerated depreciation mandated by the US Internal Revenue Code.
Monetary terms
accounting principle requiring that all assets, liabilities, expenses, and revenues be measured in units of money.
Money market
the market for ST funds.
Mortgage Bond
debt obligation guaranteed by a claim on some specific asset or assets.
Mutually exclusive choice
decision problem in which one selects one and only one asset from a menu of alternatives.
Net advantage of leasing
PV of the periodic benefits from leasing, rather than purchasing, an asset.
Net Assets
in a not-for-profit or government-owned org., the difference between total assets and total liabilities; the owners' equity claim.
the sum of the present values of the initial, operating, and terminating cash flows; the project's addition to the value of the org.
Net working capital
current assets minus current liabilities.
Net working capital committment
the additional current assets that must be acquired in order to bring an asset or project into service.
Operating cash flow
periodic cash flows associated with the use of an asset or project in place.
Opportunity Cost
the value of some benefit forgone in order to produce some good or service.
Ordering Cost
cost of making an order and of receiving shipment of an inventory or supply item.
Owners' Equity
the difference between the org's assets and its liabilities
Par Value
the principal amount (or face value) of a bond.
Pecking order theory
theory that org's have a preferred order for obtaining external financing, preferring retained earnings to new debt and new debt to new equity.
Per member per month
amount collected each month for each person enrolled under a capitated contract; covers all contractually specified health care.
Per-unit contribution margin
revenue per unit minus variable cost per unit.
Performance (or asset utilization)
class of financial ratios that indicate how effectively the org. uses its assets to generate revenues and cash.
a collection of securities.
process of transferring journal entries to the org's accounts.
Preferred Stock
equity claim against the org., entitled to a fixed annual dividend, but without any voting right unless the promised dividend is not paid.
Prepaid expenses
current asset consisting of the value of future periods' expenses paid in the current period.
Present value
the amount that, if invested today at some specified rate of interest, would generate a specified future value at a specified time in the future.
Price variance
that part of the total variance due to price's being different from that which was planned.
an amount borrowed.
any of several ratios that compare profit to some measure of organizational size.
Profitability Index
the present value of operating cash flows from use of an asset divided by the absolute value of the required initial cash flow; the project's gain per initial dollar invested.
Prospective Payment System
system for making Medicare payments to hospitals, introduced in 1983, in which compensation is predetermined, based on each patient's diagnosis upon admission.
Pure Play
a firm engaged solely in a single activity, said activity duplicating the project whose riskiness is being assessed.
Quantitative Variance
that part of the total variance due to quantity sold or purchased's being different from that which was planned.
Rating Agency
a firm specializing in assessing the riskiness of securities and of their issuers.
Ratio Analysis
analysis of financial statements via the construction of ratios; using one number taken from the financial statements to normalize another number taken from the financial statements.
Reciprocal cost allocation method
cost allocation method that allocates cost from cost centers to revenue centers via flows that run both from cost center to revenue center and from revenue center to cost center.
Responsibility Center
an organizational subunit, usually with its own budget, assigned responsibility for management or one or both of its cost and revenue.
terminal price minus initial price, plus cash flows received, divided by initial price.
sometimes called return on investment; ratio of profit to total assets.
ratio of profit to owners' equity.
Revenue Budget
that component of the budget forecasting receipt of revenues for the budget period.
Revenue Center
responsibility center charged with generating revenues.
variation in possible returns.
Risk-adjusted discount rate (RADR)
project-specific discount rate raised or lowered from the firm's weighted average cost of capital, due to the differential riskiness of the project under review.
Risk Aversion
the almost universal characteristic of preferring a given return with certainty to participating in a lottery with the same expected outcome.
Safety Stock
amount of an inventory or supply items below which one's holding should not be allowed to fall.
Secondary Market
market for securities previously issued.
to convert an asset's promised cash flows into the periodic cash flows of an associated security; to convert an asset promising cash in the future into a lump sum of cash in the present.
contract entitling the owner to future cash flows.
Security market line
ray, in beta-return space, emanating from the risk-free rate of interest, through the market's expected return and beyond.
Senior (adjective)
the order in which claims are to be paid; security A is senior to security B if the holders of A are paid their promised cash flows before the holders of B; especially important in cases of financial distress.
Sensitivity Analysis
comparison of forecasts under different basic assumptions.
Set of feasible solutions
in a linear programming problem, the set of values of the decision variables that satisfy all of the linear constraints.
Shadow cost center
cost center identified for analytical convenience, but in which there is no actual org.
Simplex theorem
theorem for the solution of LP problems; requires that the optimal solution to such a problem be at a "corner," where one variable takes a zero value, or where at least two constraints are binding simultaneously.
in auction-based stock exchanges, a member of the exchange that makes an orderly market in a listed stock; trading on the exchange occurs when brokers and dealers place orders with the specialist.
State-preference theory
theoretical approach to risk adjustment in capital budgeting; requires that utilities be attached to all possible cash flow outcomes.
Statement of Cash Flows
financial statement that converts the accrual-based income statement into a statemenet of the flow of cash into and out of the org. during the accounting period.
Statistics budget
that component of the budget forecasting service volume and resource use for the budget period.
Step-down allocation method
cost allocation method that allocates cost from cost centers to revenue centers with intermediate steps, and that closes cost centers as soon as all costs have been allocated from them.
Step-fixed cost
cost that is constant over some range of output but that rises in a discreet increment as output exceeds the upper limit of that range.
a security guaranteeing an equity claim.
condition in which one's holding of an inventory or supply item has fallen to zero.
Straight line depreciation
beginning with the full historical cost of the asset then subtracting the expected salvage value at the end of the asset's useful life divided by the number of years in the asset's useful life.
Systematic risk
the risk associated with holding any risky security; cannot be eliminated through diversification.
Systems design
the branch of accounting that deals with the design of accounting systems and the flow of financial information within the org.
Tax-exempt revenue bonds
debt instruments, backed by organizational revenues, issued by municipal authorities and, therefore, paying interest that is not subject to Federal income tax.
Tax shield
cash flow that would otherwise have been required for payment of taxes, but that is saved due to depreciation.
Term structure of interest rates
description of the relationship between term to maturity and market yield for securities within some risk class.
Terminating cash flow
cash flows recovered, through salvage value or release of net working capital committment, upon the sale of an asset or the termination of a project.
Time value of money
preference for some amount of money today over today's riskless promise of the same amount of money at some time in the future.
Times interest earned
ratio of earnings before interest and taxes to interest expense.
Top-down budgeting
budget process in which a great deal of information flows from the CFO to responsibilty centers.
Total asset turnover
ratio of revenues to total assets.
Total Margin
ratio of profit to revenues plus nonoperating gains.
Trade Credit
suppliers' willingness to defer payment (usually for periods of up to 30 days).
officer charged with stewardship of the org's financial assets.
Trial balance
step in the accounting cycle, following posting, in which debit balances are compared to credit balances to ensure their equality in the aggregate.
commercial bank representing the holders of an issue of bonds; ensures that the issuer of the bonds meets its contractual obligations.
agreement between an investment bank and an issuer of securities in which the bank guarantees a percentage of the par value of the securities to the issuer, retaining any remaining proceeds for itself.
Underwriter's spread
the difference between the selling price of an issue of new securities and the proceeds that the investment bank guaranteed to the issuer.
Unsystematic risk
the risk associated with holding a specific security; can be eliminated through diversification.
the process of estimating the market value of an org. or asset, when no record of active trading is available to establish such a value.
Variable cost
cost that varies continuously as volume varies.
difference between a forecast amount and the amount actually realized; budget variances should not be confused with statistical variances.
Variance analysis
the accounting activity that evaluates the differences between budgeted amounts and the amounts actually realized.
Weighted average cost of capital (WACC)
the cost (in percentage terms) of an additional dollar of funding, given some capital structure.
Working Capital
current assets and current liabilites (but not their sum).
Working capital management
process of managing current assets and current liabilities.
Yield Curve
graphical representation of the relationship between term to maturity and market yield for securities within some risk class.
Zero-base budgeting
budget process in which the budgets for succeeding budget periods are unrelated to those of earlier budget periods, but are justified on their own merits, as if no previous budgets have ever been prepared.

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