1. Using an accrual system, prepare an operating statement for the year and a balance sheet as of December 31. What do these statements tell you about BOGAs profitability?

2. In the absence of the banks stipulation that accrual be used, which type of systemmodified cash or accrualwould you recommend that Dr. Amsted use for BOGA? Why?

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PREPARING FOR THE MEETING To prepare for the meeting with the bank, Dr. Amsted asked Mr. Weber to construct both an operating statement and a balance sheet using the accrual method. The operating statement would be for the entire calendar year, whereas the balance sheet would be as of December 31. The accountants had provided Mr. Weber with a worksheet (Exhibit 2) to use in preparing the two statements. They also had given him their assessment of some of the account balances as of December 31. These are shown in Table B of Exhibit 1. With this information in hand, Mr. Weber began to prepare a set of financial statements on an accrual basis. Assignment 1. Using an accrual system, prepare an operating statement for the year and a balance sheet as of December 31. What do these statements tell you about BOGA's profitability? 2. In the absence of the bank's stipulation that accrual be used, which type of system-modified cash or accrual would you recommend that Dr. Amsted use for BOGA? Why? BROOKSTONE OB/GYN ASSOCIATES (A) EXHIBIT 1 FINANCIAL INFORMATION FOR THE PRIOR YEAR Table C. Accounts Receivabile Activity Table A. Operating Statement Modified Cash Basis Revenue: Receipts from patients and 3rd parties $3.995 553 Expenses: Physician payments Administrative salaries Benefits Medical supplies Rent and utilities Billing/collection fees Equipment depreciation Office expense Liability insurance Contracted services Other Contribution to Dean Total expenses $1.124.000 684.000 293,200 95,200 136,000 50732 24.000 SO,000 952,185 106.000 15.00 428511 51.745.928 January February March April May June July August September October November December Billings Receipts $ 123 200 $ 199,916 137200 222.129 453,400 246,810 120.200 274,234 188,300 301,704 507.00 338,560 529.000 350,240 552.000 362,720 577.100 376,160 604.00 390.600 636,300 406,240 668,200 423,200 (b) 5618.400 Surplus (Delicit) (SR50,375 Total 6,307,900 $ 3.895553 Table D. Accounts Receivable Activity for the Year Beginning balance Billings 6,347.600 Le contractual allowance and had debes 1.269, SRO quals er Subtotal les collections (e) Equals ending balance 5.078,320 5,726,720) 3.895553 $1.31.167 Table B. Account balances As of December 31 Cash Medical supply inventory Prepaid insurance Equipment (net) Acounts payable Payable to Dean Long term note payable Notes 110.000 125.000 250.000 1.250.000 75.000 130,104 630,000 2.8 percent of billing b. Computed on a per physician basis. 15 percent of billings is used here as an approximation c. Il percent of collection 4. Allowances and bad debes are expected to be 20 percent of billings |. Collections come with a 5 month time lag from when the patient was billed Example: January billings = $123,200. Expected collections are 123.200.2*1232) = $338.560 In June (5 months later) $338.560 is received. BROOKSTONE OB/GYN ASSOCIATES (A) EXHIBIT 2. WORKSHEET (ACCRUAL BASIS) (In thousands of dollars) OPERATING STATEMENT For the Calendar Year Notes Revenue: Professional services Same as billings Less: allowances and bad debts 20 percent of billings Net revenue Expenses: Physician payments Same as on modified cash Administrative wages Same as on modified cash Benefits Same as on modified cash Medical supplies Same as on modified cash (assumes purchases = uses) Rent and utilities Same as on modified cash Billing/collection fees Same as on modified cash Equipment depreciation Same as on modified cash Office expense Same as on modified cash Liability insurance Same as on modified cash (assumes purchases = uses) Contracted services Same as on modified cash Other Same as on modified cash Contribution to Dean 11 percent of net revenue Total expenses Surplus (Deficit) BALANCE SHEET As or December 31 Notes Assets Cash Given Accounts receivable Given Medical supply inventory Given Prepaid insurance Given Total current assets Equipment (net) Given Total assets Liabilities and Equity Liabilities Bank loan (line of credit) Not needed as of end of the year Accounts payable Given Payable to Dean Given Total current liabilities Note payable Given Equity Start-up contribution Given Retained earnings To be calculated Total liabilities and equity