Brookstone Ob-Gyn Associates Harvard Case Solution & Analysis

BACKGROUND

Brookstone Ob-Gyn Associates (BOGA) is a renowned hospital, it has associations with Brook stone medical school, and Brook stone medical center. It has served its customers for a long time with its exceptional services and gained customer satisfaction over a time period.

brookstone ob gyn associates case solution

brookstone ob gyn associates case solution

The President of Brookstone Ob-Gyn Associates (BOGA), Dr. Mark Amsted, is well known for his tremendous services. He is also the chair of the department of Obstetrics and Gynecologyas well as chief of Ob-Gyn at Brook stone Medical center.

BOGA has been taking loans for its operational needs from Harris National Bank for a long time. The accounting policy adopted by BOGA is that it recognizes its revenue when the cash is received and recognizes the expense upon the payment of the cash. This policy was followed by BOGA up to 2000. From the start of 2000, upon the request of Mrs. Tanshel, the bank loan officer at Harris National Bank, has requested Mr. Mark Amsted to change the accounting policy of the hospital from modified cash basis to accrual basis as it is unable to satisfy the bank’s requirement. Upon such request by Mr. Tanshel,Mr. Mark Amsted had changed the accounting policy of BOGA to an accrual basis.

According to the accrual basis accounting policy, the revenue should be recorded when it is earned whether the payment is received or not, and the expense should be recorded when it is accrued. Accrued expense means that when the company is liable to pay a certain expense, it should record such expense irrespective of the fact that it is paid or not.This accrual basis accounting policy is required to be maintained by the company, according to International Financial Reporting Standards (IFRS).

Mr. Mark Amsted had taken a credit line from the bank up to $300000at the start of January 2001, on the terms that he would repay the loan completely at the end of the year. He was of the view that this credit line would be enough for generating handsome profits of the hospital for the entire year. He also thought that this credit line would be enough for running the operations of the hospital for the entire year of 2001 without having cash flow issues.

After the decision made by Mr. Mark Amsted of implementing the accrual basis accounting policy into the hospital,he was delighted to see the drastic increase in revenue of the hospital in the early months of 2001. Later, he realized that the hospital was having serious cash flow problem as the credit line of $300000 was nearly exhausted at the end of June 2001.

He is unable to determine the reason of such cash flow deficit. He is chaoticas to why the hospital is facing serious cash flow problem in spite of generating huge profits. He thought that the reason for such cash flow problem is because of the change in accounting policy. He alsothought that the hospital would not be in such situation if the previous policy would have been followed.

FINANCIAL ANALYSIS.

The management has forecasted the financial aggregates for the remaining months of 2001. The management has forecasted these amounts by looking at the historic financial backgrounds and the historic financial trends of the hospital. On the basis of these values, forecasted financial statements are prepared to analyze the profitability of the hospital.

In exhibit 1, a projected income statement has been created which shows that there is a continuous increase in revenue of the hospital for the month July, August, September, October, November, and December of  amounts $611,000, $623,000, $635,700, $648,400, $661,000, and $674,600respectively. This shows that the management has assumed that the growth rate for the entire year would remain 1.02.

Brookstone Ob-Gyn Associates Case Solution

On the other hand, it is clear that the bad debts of the hospital would also be increasing, which would negatively affect the profitability of the hospital. In addition to this, the projections also show that the salaries of physicians would increase from $130,000 to $141,600 and would remain $141,600 for the entire year. This increase in salary is because of hiring new physicians in June 2001. Administrative salaries have also increased because of hiring new administrative staff.

The positive aspect depicted by the analyses of the projected financial statements is the continuous increase in profits of the hospital. The profits shown by the projected income statement for the months July, August, September, October, November, and December are $39,200, $46300, $53,600, $60,700, $68,300, and $ 76,000 respectively...............

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