Exercise 14–2: Cumulative Inflation Factor for Comp Chapter Notes: Inflation means “an increase in the volume of money and credit relative to available goods and services resulting in a continuing rise in the general price level.”1 An inflation factor is used to compute the effect of inflation. Let’s assume that hospital 1’s General Services expenses for Year 1 were $800,000, versus $900,000 for Year 2. We can assume that these amounts reflect actual dollars expended in each year. But let us also now assume that inflation caused these expenses to rise by 5% in Year 2. If the Chief Financial Officer (CFO) decides to take such inflation into account, a government source will be available to provide the appropriate inflation rate. (The 5% in our example is for illustration only and does not reflect an actual rate.) The inflation factor for this example is expressed as a factor of 1.05 (1.00 plus 5% [expressed as .05] equals 1.05). The CFO might apply the inflation factor to year 1 in order to give it a spending power basis equivalent to that of year 2. (Applying an inflation factor for a two-year comparison is not usually the case, but let us assume the CFO has a good reason for doing so in this case.) The computation would thus be $800,000 year 1 expense times the 1.05 inflation factor equals an inflation-adjusted year 1 expense figure of $840,000. However, if the CFO wants to apply an inflation factor to a whole series of years, he or she must account for the cumulative effect over time. An example appears in Table l4–3. We assume a base of $500,000 and an annual inflation rate of 10%. The inflation factor for the first year is 10%, converted to 1.10, just as in the previous example, and $500,000 multiplied by 1.10 equals $550,000 in nominal dollars. Beyond the first year, however, we must determine the cumulative inflation factor. For this purpose we turn to the Compound Interest Table. It shows “The Future Amount of $1.00,” and appears in Appendix B of the chapter about time value of money. “The Future Amount of $1.00” table has years down the left side (vertical) and percentages across the top (horizontal). We find the 10% column and read down it for years one, two, three, and so on. *Assignment Exercise 14–2: Cumulative Inflation Factor for Comp Revise Hospital 2’s projections by applying a cumulative inflation factor of 5% per year. Review Tables 14–3 and the accompanying text below: SOURCE OF FACTOR IN COLUMN C ABOVE: From the Compound Interest Look-Up Table “The Future Amount of $1.00” (Appendix 12-B) Table 14–3 Applying a Cumulative Inflation Factor Year Factors as shown at 10% 1 1.100 2 1.210 3 1.331 4 1.464 Table 14–3 (A) (B) ...

1. Exercise 14–2: Cumulative Inflation Factor for Comp
Chapter Notes: Inflation means “an increase in the volume of
money and credit relative to available goods and services
resulting in a continuing rise in the general price level.”1 An
inflation factor is used to compute the effect of inflation.
Let’s assume that hospital 1’s General Services expenses for
Year 1 were $800,000, versus $900,000 for Year 2. We can
assume that these amounts reflect actual dollars expended in
each year. But let us also now assume that inflation caused
these expenses to rise by 5% in Year 2. If the Chief Financial
Officer (CFO) decides to take such inflation into account, a
government source will be available to provide the appropriate
inflation rate. (The 5% in our example is for illustration only
and does not reflect an actual rate.)
The inflation factor for this example is expressed as a factor of
1.05 (1.00 plus 5% [expressed as .05] equals 1.05). The CFO
might apply the inflation factor to year 1 in order to give it a
spending power basis equivalent to that of year 2. (Applying an
inflation factor for a two-year comparison is not usually the
case, but let us assume the CFO has a good reason for doing so
in this case.) The computation would thus be $800,000 year 1
expense times the 1.05 inflation factor equals an inflation-
adjusted year 1 expense figure of $840,000.
However, if the CFO wants to apply an inflation factor to a
whole series of years, he or she must account for the cumulative
effect over time. An example appears in Table l4–3. We assume
a base of $500,000 and an annual inflation rate of 10%. The
inflation factor for the first year is 10%, converted to 1.10, just
as in the previous example, and $500,000 multiplied by 1.10
equals $550,000 in nominal dollars.
Beyond the first year, however, we must determine the
cumulative inflation factor. For this purpose we turn to the
Compound Interest Table. It shows “The Future Amount of
$1.00,” and appears in Appendix B of the chapter about time

2. value of money. “The Future Amount of $1.00” table has years
down the left side (vertical) and percentages across the top
(horizontal). We find the 10% column and read down it for
years one, two, three, and so on.
*Assignment Exercise 14–2: Cumulative Inflation Factor for
Comp
Revise Hospital 2’s projections by applying a cumulative
inflation factor of 5% per year.
Review Tables 14–3 and the accompanying text below:
SOURCE OF FACTOR IN COLUMN C ABOVE: From the
Compound Interest Look-Up Table “The Future Amount of
$1.00” (Appendix 12-B)
Table 14–3 Applying a Cumulative Inflation Factor
Year Factors as shown at 10%
1 1.100
2 1.210
3 1.331
4 1.464
Table 14–3
(A) (B) (C)
(D)
Year Real Dollars Cumulative Inflation Factor*
Nominal Dollars**
1 $500,000 (1.10)1 = 1.100
$550,000
2 $500,000 (1.10)2 = 1.210
$605,000
3 $500,000 (1.10)3 = 1.331
$665,500
4 $500,000 (1.10)4 = 1.464
$732,050
*Assume an annual inflation rate of 10%. Thus 1.00 + 0.10 =
the 1.10 factor in Column C.

3. **Column D “Nominal Dollars” equals Column B times Column
C.
Note: As shown in Table 14–3.2, the factor for year 2 is 1.210;
for year 3 is 1.331, and so on. We carry those factors to column
C of Table 14–3.1. Now we multiply the $500,000 in column B
times the factor for each year to arrive at the cumulative
inflated amount in column D. Thus $500,000 times the year 2
factor of 1.210 equals $605,000, and so on.
Projected Revenue
Year 1 Year 2 Year 3 Year 4
Year 5
Hospital 1 $20,000,000 $22,500,000 $27,500,000
$27,500,000 $30,000,000
Hospital 2 $20,000,000 $21,000,000 $25,000,000
$24,000,000 $26,000,000
*Exercise 14–3 Currency Measures
Chapter Notes: Monetary unit measurement, and the related
currency measures and currency conversions, are typically
beyond most manager’s responsibilities. Nevertheless, it is
important for the manager to understand that consistency in
applying such measures and conversions will be a significant
factor in expressing financial results of companies that have
global operations.
Therefore, for comparative purposes we must determine if all
the information being prepared or under review is measured by
the same monetary unit. A few foreign currency examples are
illustrated in Exhibit 14–1. Currencies are typically converted
for financial reporting purposes using the U.S.-dollar foreign
exchange rates as of a certain date.
Exchange rates may be expressed in two ways: “in U.S. dollars”
or “per U.S. dollars.” For example, assume the euro is trading at

4. 1.3333 in U.S. dollars and at 0.7500 per U.S. dollars. That
means if you were spending your U.S. dollar in, say, France
(part of the “euro area”), it would take a third as much (1.33) in
your dollars to buy products priced in euros. If your French
friend, on the other hand, was spending euros for products
priced in U.S. dollars, he or she could buy one-quarter more for
his or her money (because the U.S. dollar would be worth only
three quarters [0.7500] of the euro at that particular exchange
rate).
Standardized Measures
A final word about standardized measures. Standardized
measures aid comparability. They especially assist in
performance measurement. Types of standardized measures
include the typical hospital per-bed measure along with work
load measures.
There is, of course, a whole array of uses for standardized
measures. Managed care plans, for example, may use a standard
set of measures that are applied to every physician who
contracts with the plan. Each physician then receives a report
from the plan that illustrates his or her performance.
Exhibit 14–1 Foreign Currency Examples
Country (or Area)Currency
Canada Canadian
dollar
China Yuan
Euro Area Euro
Japan Yen
Mexico Peso
United Kingdom Pound
*Assignment Exercise 14–3
Two hospitals report their annual projected revenue for five
years to the local newspaper for a story on the area’s future
economic outlook. However, Hospital 1 has applied a
cumulative inflation factor of 5% per year while Hospital 2 has
not applied any inflation factor. Thus the information is not
properly comparable. Locate the current exchange rates for

5. pounds and euros and compute the currency conversion for $500
and for $1,000.
*Exercise 14–4: The DiscoveryChapter Notes:
Managers use charts to explain their projects and to report their
results. Thus constructing accurate and effective charts is a
valuable skill.
There are four basic chart styles as follows:
• Column chart
• Pie chart
• Bar chart
• Line chart
The column chart’s data is presented in vertical columns. The
pie chart is typically circular (like a pie, thus its name). The bar
chart presents data in horizontal bars. The line chart generally
uses multiple lines that track along a grid.
Chart Content and Format
Constructing the chart means answering a series of questions
about content and format, as follows:
• What is the subject of the chart?
• What are the specific elements to be included?
• What type of chart will best serve my purpose?
• Is the information accurate and consistent?
• If applicable, is the information comparable?
• What are the dimensions of the chart?
• If applicable, what is the span between high and low?
Chart Templates
A variety of chart templates are now available online. They are
generally found within office suite programs. Each template
typically offers a drop-down menu for specifics of the format
and a second drop-down menu for the chart’s data input.
Electronic templates also provide quick and easy color choices
for your chart presentation. You can experiment with various
colors to reach the best combination for your project. To
summarize, the chart you construct can be simple or elaborate.
It can be black and white or it can be multi-colored. But

6. whatever its style, your chart must contain accurate and
comparable data.
*Assignment Exercise 14–4:
The Chief Financial Officer at Sample General Hospital has just
discovered that the hospital’s Chief of the Medical Staff’s son
Jason, a student at the local community college, is paid $100
per week year-round for grounds maintenance at the hospital’s
Outpatient Center. The CFO, no fan of the Chief of Medical
Staff, now wants you to prepare a report that compares the
relative costs of lawn care at each of three locations: the
hospital itself, the outpatient center, and the hospital-affiliated
nursing home down the block. (Review the available
information for grounds maintenance at the three facilities.
Decide how to convert this information into comparable data.
Then prepare a report, based on your assumptions, that presents
comparable costs of grounds care. Also provide your assessment
of what the best future course of action should be).
Introduction to the Three Facilities
Sample General Hospital is an older 100-bed hospital. The new
Outpatient Center, built last year, is across the street and the
Golden Age Nursing Facility is down one block, on the corner.
All three facilities are part of the Metropolis Health System.
(Appendix 28-A contains some financial details about Sample
Hospital.) The hospital is located in the midwestern sunbelt;
there is occasional frost in the winter but no snow.
Grounds Maintenance Tasks That Should Be Performed at All
Three Sites
• Mowing and edging
• Walk sweeping
• Raking leaves
• Blowing off parking lot
• Flower bed maintenance (where necessary)
• Hedge trimming and minor tree pruning (major tree trimming
is performed by a contractor on an as-needed basis and thus
should be disregarded)
Figure Ex-1 below provides a map that illustrates the layout of

7. the grounds for each facility and their proximity to each other.
Grounds Maintenance Arrangements for the Three Facilities
The current grounds maintenance arrangements vary among the
three facilities as follows:
1. Sample General Hospital uses its Maintenance department
employees for grounds care. The hospital pays these employees
$15 per hour plus 15% employee benefits; it is estimated they
spend 1,000 hours per year on grounds maintenance work.
Another estimated 120 hours per year are spent on maintaining
the lawn care equipment. The employees use a riding lawn
mower, edger, and blower, all owned by the hospital. The
hospital just bought a new mower for $2,995 less a 10%
discount. It is expected that the mower should last for five
years.
2. The hospital’s Chief of the Medical Staff’s son Jason, a
student at the local community college, is paid $100 per week
year-round for grounds maintenance at the hospital’s Outpatient
Center. A friend sometimes helps, but when that happens Jason
pays him out of his weekly $100. It takes about 1.5 hours to
mow, edge, and blow. Jason uses his dad’s riding mower and
blower, but Jason recently bought his own edger. Jason also
buys fertilizer for the grass twice a year.
3. The Nursing Facility contracts with a landscape service on a
seasonally adjusted sliding scale. The landscape service is paid
$600 per month from April to October (mowing season); $400
per month for February, March, and November; and $200 per
month for November, December, and January. The landscape
service provides all their own equipment. They also provide
fertilizer and provide annuals to plant in the flower beds every
quarter.
Sample General Hospital Property Description
The grounds to be maintained are as follows:
• The front lawn is grass in two sections on either side of the
front entrance. Each section is about 50′ by 60′.
• There is a hedge along the front of the building that is about

8. 50′ on either side of the front entrance.
• There are two small matching flower beds on either side of the
front entrance.
• Another strip of grass alongside of the building is 30′ by 100′.
• A third small strip of grass about 5′ by 25′ is by the
Emergency entrance.
• The walkway dimensions are as follows: about 50′ of front
walk; about 30′ of staff entrance walk, both of which are 5′
wide.
• The Emergency Department’s paved patient drop-off area is
about 25′ by 30′.
• The parking lot surface is about 200′ by 250′. Along one side
are overhanging trees that drop leaves and debris and are a
constant sweeping problem. These are the only trees on the
hospital site.
Outpatient Center Property Description
The grounds to be maintained are as follows:
• There is a strip of grass at the front of the building that is 12′
wide and 65′ long, split in the middle by a walkway 5′ wide.
• There is a strip of grass at the back of the building between
the building and the parking lot that is 5′ wide and 50′ long
• All the rest of the property is paved.
Nursing Center Property Description
Golden Age Nursing Center occupies one whole block. The
grounds have many large trees. Flowerbeds have been planted
around the trees as well as along the front walk and entrance.
There are also two secured patio areas at the side of the
building, screened by hedges, and each has a small bed of
annuals. Because of the unique design of the building, grounds
maintenance requires considerable handwork such as edging
with a weed eater.