Soon after completing a class in Health Care Finance and receiving your degree, a promising job opportunity arises. At the reception following your graduation ceremony, a fellow student introduces you to Mr. Ed, a friend of his family. Mr. Ed is a health clinic owner and he needs financial advice. Mr. Ed says he is about to sell his very successful health clinic business and needs some basic financial statements prepared. He will send these statements to an out-of-state venture capitalist who has expressed interest in buying the business. Mr. Ed says he will pay you a nice sum to do this work for him. A few days later you visit Mr. Eds clinic.

To determine your suitability for this project the following dialog ensues:

Mr. Ed: Good morning. First I must ask, 'What three basic financial statements should be prepared for my business?"

You: Thats easy. They are the X, the Y and the Z. List these: ________________________

___________________________________________________________

Mr. Ed: Fine, lets get started. For the past ten years I have run this alternative medicine clinic in Hollywood. We have ten staff members who provide pain management services using the following modalities: acupuncture, acupressure, herbal medicine, health education, aerobics and nutritional counseling. Ill show you around the clinic. Ask me whatever you need to know.

You spend the day touring and you are impressed by the clean facilities, the modern equipment, the pleasant staff and the well appointed waiting room full of patients. You ask a lot of questions and also look over some financial records.

You: Thank you, Mr. Ed. I have reviewed the facilities, the books and the legers and have more questions. The records show expenses for 2005 but no revenue. I found the revenue for 2006 but no expenses. The 2005 records seem to have been prepared on a cash basis, and the 2006 records on an accrual basis. Are there other records and working papers which will clarify this for me?

Mr. Ed: My associate administrator maintained all the financial records. Recently he quit his job due to a pay dispute. He was so upset that he destroyed some of these records before he left. Dont worry. You can explain this in the statements. Im sure the readers will understand.

You: Asset valuation requires that I ask: what is your most important asset in the clinic? Your building? Equipment? Staff? Reputation?

Mr. Ed: Clearly my biggest asset is my secretary. She is also my main financial and spiritual advisor. I go to her with all the difficult decisions. She has a guardian angel and she is a gifted clairvoyant. She uses a Ouija Board and she always comes up with the right answers. Her advice has been superb so far, and the business is thriving.

You: What value should we place on this asset?

Mr. Ed: Her advice is invaluable. However, if you must list an amount, show it as $1 million.

You: What is the biggest problem facing the clinic right now? (CONTINUTED OVER )

Mr. Ed: Basically everything is OK, but I am concerned about the neighborhood environment. There is always lots of graffiti from local gangs that scares some patients away. Beyond that there is a large lawsuit hanging over my head. A patient fell and was injured in our clinic last year. She is suing us for $1 million. It all started when the subway was constructed several years ago. Subterranean gas leaks created some sink holes in the neighborhood. They have since been reinforced, but I am still concerned about the sinking floor in our basement. I am worried that another patient will be fall down and our clinic will be blamed. Please do not mention any of this in your reports. There is nothing I can do about it, and the new owner will figure out what to do when he gets here.

You: What are your plans for dealing with this problem?

Mr. Ed: Actually, I was planning to declare bankruptcy, and then this potential buyer came along. Please do not include this in your statements, for obvious reasons.

You: What did it cost to purchase this clinic ten years ago?

Mr. Ed: I dont have an exact number, because I simply exchanged my previous business with the former owner for this clinic, and we called it even. My previous business was a posh restaurant. However, if you must list a cost, show it as $3 million.

You: Tell me about your clinic appointment system. Also, how do you know whether you are breaking even or are in the red?

Mr. Ed: No problem. The patients pay cash for all services, and they keep returning for more. We dont need an appointment system, because there is always a line of patients at the door. Excuse me, but now I must leave for a luncheon appointment with the local representative of the potential buyer, the venture capitalist. Call me if you need further information. May I have the financial statements in one week? Thanks, and you will be paid handsomely.

You: Thank you, Mr. Ed. I will get back to you soon. However, Im not sure I can do the statements for you. I am not a CPA.

Mr. Ed: You have a degree with a specialization in health care finance from one of the most prestigious universities in town. I dont believe you cant do it. Please, I need your help now.

After saying goodbye to Mr. Ed, you gather your thoughts and start planning how to attack the problem. The next day you visit your favorite Professor of Health Care Finance to discuss this opportunity. You explain the situation in detail and ask for advice on how to proceed.

Your professor ponders it all and responds somewhat inscrutably, Before you begin the financial statements, list the accounting principles that apply. Then you will know what to do.

1. List the three basic financial statements.

2. List 7 principles of accounting are violated in this story. Give an example of each principle violated.

3. Would you accept Mr. Eds offer of employment? Why or why not?