Answer Happy

Instructions:
 Read the case in its entirety!
 Answer the questions at the end of the case study (before
exhibits). Use the questions as a
guideline only. Do not just answer the questions or number them in
your paper!
 Write a brief introduction that includes an overview of the case
and identify the main issues.
 Write a strong conclusion with a recommendation for Dr.
Jones.
 Follow APA 6th edition guidelines.
Case: Adapted from International Research Journal of Applied
Finance. Wandler S.; Watson, K. (n.d.)
Case Studies in Finance and Accounting (www.irjaf.com); Sunset
Medical: A Statement of Cash Flow
Case
Introduction:
Dr. Sally Jones, a practicing Orthopedic Surgeon, is the managing
partner at Sunset Medical, a
professional corporation located in Colorado. Sunset, which has
been in business for approximately 10
years, is a small medical practice with 2018 revenues of just over
$1,000,000. The practice employs a
support staff that includes an office manager, billing secretary,
nurse, and radiology technician. In
addition to the staff, Sunset retains Jackson and Associates, a CPA
firm, to provide financial statements
and tax documents.
As a small, privately held corporation, Sunset is only required to
submit an Income Statement and
Balance Sheet using cash basis accounting, which Jackson and
Associates prepares. Most of the staff and
the CPA firm have been with Sunset Medical for all ten years of
Sunset’s operation.
Exhibits 1 and 2 show the Income Statements and Balance Sheets
provided by Jackson and Associates
for the years 2016, 2017, and 2018. In January 2019, Sunset was
considering the purchase of a new XRay
machine and attended a trade show to do some research. While
attending the trade show, Dr. Jones
was approached by Ron Wilson of Physicians Management Inc. (PMI)
with a proposal to provide
management and billing services to Sunset Medical. Mr. Wilson is
the founder and CEO of PMI, a twoyear
old medical billing and administrative service company serving the
southwest United States. PMI
based its value proposition on increasing revenues, decreasing
administrative expenses, and helping
manage cash flows.
Since administrative paperwork and billing averages between 4 and 9
percent of the expenses for most
healthcare providers, not including lost revenue from billing
errors, Dr. Jones decided to hire PMI to
manage the practice. On February 3, 2019, a contract was signed,
effectively turning over management
duties of Sunset Medical to PMI.
The Physicians Management Contract:
A few key points from the contract between Sunset Medical and PMI
include the scope of the
engagement, party responsibility, and compensation of PMI.Exhibits
3 and 4 contain excerpts from the contract discussing authority,
responsibility, and
compensation. Under the initial contract, PMI was to serve as the
manager of the practice and assist the
Business Office Manager in the day to day operation of the
practice. Specifically, PMI was responsible
for marketing, public relations, staffing (including the
recruitment, hiring, and supervision of the
Business Office Manager), and administration of the company’s
corporate compliance plan, as well as
for providing unaudited financial statements including an Income
Statement, Balance Sheet, and Cash
Flow Statement.
To compensate PMI, Sunset agreed to pay a monthly management fee
equal to four percent of monthly
net revenue, determined on the accrual basis. Net revenue was
determined based on gross billed
revenue less contractual allowances and a reasonable allowance for
uncollectable accounts.
Additionally, Sunset agreed to pay a billing and collection fee
equal to five percent of the company’s
monthly net receivables.
Physicians Management Inc. – Mid-Year Performance Review:
PMI began administration of Sunset in February of 2019 and
immediately began making changes to the
practice. Under PMI management, Sunset borrowed $100,000; using the
note and cash on hand to
purchase a new X-Ray machine at a cost $171,145. In accordance with
the contract, Jackson and
Associates was taken off retainer and PMI provided Dr. Jones with
the Income Statement, Balance
Sheet, and Statement of Cash flows for the six months ended June
30, 2019 (Exhibits 5, 6, and 7).
With the six month financial statements in hand, Mr. Wilson
informed Dr. Jones of the increased
revenues and cash flows. Citing these increased revenues and cash
flows, Mr. Wilson asked Dr. Jones to
give PMI more control of the company, including power to terminate
employees. Dr. Jones granted the
additional power and PMI immediately terminated the contracts of
both the office manager and the
billing secretary. Within days, PMI hired Jack Johnson, Mr.
Wilson’s son-in-law, as the new Business
Office Manager.
Physicians Management Inc. – 2019 Year End Performance
Review:
In the beginning of 2020, PMI released Sunset Medical’s 2019
financial statements to Dr. Jones. The
financial statements indicated that under PMI management, Sunset
increased revenues from
$1,167,041 in 2017 to $1,601,050 in 2019. However, despite earning
more than $400,000 in additional
revenue, Sunset’s cash had fallen dramatically during the year. In
fact, Dr. Jones had borrowed $200,000
during the year, including the $100,000 utilized to purchase the
X-Ray machine.
Exhibits 8, 9, and 10 show the year ended December 31, 2019 Income
Statement, Balance Sheet, and
Statement of Cash Flows as released by PMI. Upon receiving Sunset’s
financial statements from PMI in
January of 2020, Dr. Jones began analysis of Sunset’s business
practices to determine why the company
was required to borrow a significant amount of money to maintain a
positive cash flow.
While the X-Ray machine had cost in excess of $175,000, Dr. Jones
was at a loss to explain the need to
borrow an additional $200,000, especially in light of an additional
$400,000 in revenue. Dr. Jones has
asked you to utilize the Financial Statements prepared by Jackson
and Associates and PMI as well as the
contract between Sunset Medical and PMI to determine whether Sunset
should retain PMI’s
management and billing services for 2020 or terminate the
contract.Assignment:
Is Physicians Medical Inc. acting in the best interest of Sunset
Medical, P.C.? Did actual revenues jump by
over $400,000 in 2019? Are the Financial Statements prepared by PMI
correct? Is there sufficient
motivation for PMI to provide the services needed to support Sunset
Medical, P.C.? What ethical
dilemmas face PMI?
1. Examine the 2019 financial statements provided by PMI and the
2018 financial statements provided
by Jackson and Associates to answer the following. (Accounting
questions)
a) Discuss the differences in the Financial Statements and the
effect that these differences have on
the Revenues and Receivables.
b) Discuss the ethical dilemma facing PMI in terms of preparing the
Financial Statements.
2. Examine the contract and discuss how the contract language may
be altered to reduce the ethical
dilemma facing PMI. Additionally, how may the contract language be
altered to provide incentives for
PMI to perform in a manner that is more in line with desires of
Sunset Medical? (Finance question)
3. Should PMI’s management and billing services be retained or
should Dr. Jones bring the management
and billing functions back in house? (Finance question)