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?

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 Receivable Activity Table A. Operating Statement Modified Cash Basis Revenue: Receipts from patients and 3rd parties $3,895,553 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 January February March April May June July August September October November December $1,124,000 684,000 293,200 95,200 436,000 507,832 24,000 50,000 952,185 106,000 45,000 428,511 $4,745.928 (a) Billings Receipts 423,200 $ 199,916 437,800 222.129 453,400 246,810 470,200 274,234 488,300 304,704 507.800 338,560 529.000 350.240 552.000 362,720 577,100 376,160 604.600 390.640 636,300 406,240 668,200 423,200 (b) Total $ 6,347,900 $ 3.895,553 (c) $648,400 Surplus (Deficit) ($850,375) Table D. Accounts Receivable Activity for the Year Beginning balance Billings 6,347.900 Less: contractual allowances and bad debts (d) 1.269,580 Equals: net revenue Subtotal Less: collections (e) Equals ending balance 5,078,320 5,726,720 3,895,553 $1,831,167 $ Table B. Account balances As of December 31 Cash Medical supply inventory Prepaid insurance Equipment (net) Accounts payable Payable to Dean Long-term note payable Notes 110,000 125,000 250,000 1,250,000 75.000 130,104 630,000 a. 8 percent of billings b. Computed on a per-physician basis. 15 percent of billings is used here as an approximation. c. 11 percent of collections d. Allowances and bad debts are expected to be 20 percent of billings le. Collections come with a 5 month time lag from when the patient was billed Example: January billings = $423,200. Expected collections are 423,200 - (-2*423,200) = $338,560 In June (5 months later) S338,560 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 Of December 31 Notes Assets Cash Accounts receivable Medical supply inventory Prepaid insurance Total current assets Equipment (net) Total assets Given Given Given Given Given Not needed as of end of the year Given Given Liabilities and Equity Liabilities Bank loan (line of credit) Accounts payable Payable to Dean Total current liabilities Note payable Equity Start-up contribution Retained earnings Total liabilities and equity Given Given To be calculated