Semester 1 | 2018

ACCT10001
Accounting Reports and Analysis

Group Assignment (Part B): Business Memo based on

Financial Statement Analysis

Group Assignment (Part B)

This assignment will constitute 7% of your final grade in this subject. It is a requirement that
the assignment be completed by students as a group of three (3) or four (4) from within the
same registered tutorial unless an alternative arrangement has been formally approved.

All students have been allocated to groups. If you have not been able to contact the
members of your group, you must contact the subject coordinator by emailing ara-
enquiries@unimelb.edu.au

Submission Deadline

Part B: Business Memo – 4:00PM on Friday, 18th of May 2018. This part constitutes 7% of
your final grade and must be submitted via the Turn-it-in Assignment Tool on the LMS. The
financial statements and ratios provided for Part B is entirely independent of Part A of the
group assignment. A coversheet must be signed and included with Part B of the assignment.
Part B must also be submitted as a single PDF file.
The context
You are working for a Melbourne-based accounting/consultancy company, ARASS Consulting.
Recently, your company has been approached by NextCare Urgent Care, a U.S.-based urgent
care and walk-in clinic provider, who is looking at expanding into Australia through buying an
existing business. Currently, NextCare has over 139 medical centres.

NextCare has identified Universal Medical Centre (UMC), a small proprietary medical centre
in Victoria, as a prospect and has contacted your company for advice on whether they should
invest in UMC, from a financial perspective. NextCare is seeking the best value for money and
potential for growth, and is looking to acquire UMC for $5 million.

Your boss, Martha Jane, approached your team and asked you to analyse the financial
statements of UMC and write a brief (1200-word) internal memo containing your
recommendation as to whether $5 million is a reasonable asking price for NextCare’s
purchase of UMC. The memo should identify your key findings, which should support and is
followed by your final recommendations. Your analysis will consider a range of issues but not
all of these will necessarily be included in your final memo.

Disclaimer:
The numbers in this assignment are purely fictitious to meet the needs of the assignment.
While NextCare Urgent Care is a real American company, it has been chosen purely to meet
the needs of the assignment. It is not known if they have any plans to expand into Australia.
Any resemblance to actual businesses or companies, in the past, present or future, is entirely
coincidental.
Part B
Write a business memo to your boss, Martha Jane, advising her as to whether or not
NextCare Urgent Care should acquire Universal Medical Centre (UMC) for $5 million

This report is completely independent of the ratio calculation conducted for Part A of the group
assignment. Therefore, the analysis should be based on the financial statements and ratios
provided for Part B.

Your report should be in the form of a memo, style guidelines for which will be made available
on the LMS and through academic skills support resources. The report should identify the key
findings that support your recommendation followed by your final recommendations. Your
analysis will consider a range of issues but not all of these will necessarily be included in your
final report.

The report should not simply be repeating the ratios in narrative form. Rather, the purpose of
the report is to investigate the reasons BEHIND the ratios and financial statements to highlight
the underlying strengths and weaknesses of the company.

A glossary is not required; you can assume that your boss has the technical accounting skills
and knowledge needed to understand ratio analysis.

Word Limit

The word limit for the body of the report is 1200 words. This is a WORD LIMIT (i.e.
beyond 1200 words will not be graded). Any figures, diagrams, headings or charts you wish
to include in the body of your report are excluded from the word count.

It should be noted that it is not possible to comment on every aspect, strength and weakness
of the company within this word limit. You are to identify the three (3) major points and keep
your explanations as succinct as possible.

Format

The following requirements should be adhered to in your report:

• Minimum 1.5 line spacing

• Times New Roman font, size 12 for the text of the report (headings may be
differentiated)
• Appropriate heading structure, numbering and format
• A minimum of 2.5 centimetre margins all around
• Above all this is supposed to reflect business memo, therefore your format, use of
headings, spacing and white space are to reflect this style of report.
The first page of the report should be the Faculty of Business and Economics (FBE) group
cover sheet (in addition to format requirements described above) as downloaded from the
LMS.

It is also important to note that this is a single report, not a series of disjointed sections that
amalgamates individuals’ work. Marks may be deducted for noticeable differences in language,
style, format and inconsistencies in argument that occur within your report.
Background
Medical centres and doctors

For legal and taxation reasons doctors and medical centres are separate entities. The medical
centres own the assets such as building and equipment. The medical centres also employ the
administration staff, take bookings, provide the supplies etc.

The doctors then pay a service fee to the centre to have access to these facilities. It is the
doctor who charges patients, not the medical centre.

Historically these medical centres were set up as a service trust as a means of protecting
assets and splitting profit for taxation purposes (as opposed to a partnership with higher
individual tax rates and mutual liability) and owned by the doctors who operated out of them.
Medical centres are increasingly being owned by corporations (such as Healthscope) and run
as profit enterprises. The medical centres then form a contract with the doctor for the supply
of medical services to operate in the medical centre. As part of this agreement the medical
centre will stipulate items such as how much doctors can charge, appointment length etc. to
ensure consistency (uniformity) amongst all doctors operating in the centre.

Medical
Centre

Medical centres set the

Doctors pay the Medical
appointment details, i.e.
Centre
price and how long

Doctors Patients

Patients (Medicare)
pay the Doctors
Paying doctors, bulk billing / direct billing or upfront
As with any service there is a cost to see a doctor, however it is possible for a patient to see
a doctor for free. The Australian government (or Overseas Student Health Cover provider,
OSHC) have a set rate that they are prepared to pay doctors for each visit. The doctors can
choose how much to charge patients, with the set rate effectively being the minimum amount.

If doctors choose to charge the minimum amount (bulk billing/direct billing), they will bill
Medicare (or the OSHC provider) directly meaning that the patient does not need to pay. If the
doctor wishes to charge more than this minimum amount they normally charge the patient the
full amount and the patient can claim back the minimum amount from Medicare (or OSHC
provider). Sometimes a “gap” charge is done.

The amount that Medicare (OSHC) pays is dependent on the length of visit. As a general
guide the following table can be used for General Practitioners (GPs):

Visit Length Payment ($)

0-5 minutes 33
6-25 minutes 63
26-45 minutes 114
Universal Medical Centre (UMC)
Universal Medical Centre (UMC) is the Victorian subsidiary of an interstate company that has
recently gone into liquidation due to its inability to meet its debt payments. The liquidators
believe that UMC (which operates under a different name to the parent company), is a going
concern and are seeking its sale to meet the debt obligations of the parent company.

UMC owns three recently built medical centres/complexes located in the newer suburbs of
Melbourne. These centres were all built in the last three to five years and were the first medical
practices in these areas.

The medical centre in addition to General Practitioners (GPs), offers rooms to visiting medical
specialists (such as surgeons) and allied health providers (physiotherapy, dietician,
psychologists) which attend the centre on a regular basis as well as a pathology collection
point. Next to the medical centre, but within the same complex, the company also leases space
to a radiology centre (x-ray, ultrasound etc.) and a chemist. This allows patients to attend the
one location for all their health needs that does not require hospital level treatment.

The medical centre also has a large treatment room and surgical rooms to handle things, such
as wound care, immunisation, managing ongoing conditions and diseases, and minor surgery
done under local anaesthetic performed by GPs or visiting surgeons. Each centre also has a
hospital grade emergency room. These rooms are staffed whenever the centre is opened by
a team of nurses, and a doctor is rostered on each morning. For insurance/legal purposes the
nursing service is operated as a separate business to the medical centre.

The centre uses appointments (only emergency cases are seen without an appointment),
which are normally 15 minutes in length or longer appointments of 30 minutes. Patients get to
choose their own doctor with most opting to see the same doctor each time. Patients pay
upfront $85 for a standard appointment, and $140 for a longer appointment. Patients receive
back the Medicare (OSHC amount) at a later point in time. Discounts apply for health care
card holders (low income earners and welfare recipients) and pensioners are bulk billed.
Specific charges apply for non-standard consultations.

All medical practitioners, allied health providers and the nursing service are charged a service
fee for the room access. GPs are given dedicated rooms and have dedicated early morning,
after hours and one weekend day a month in which they work.

Any equipment or supplies used during a consultation are charged separately and included in
the monthly invoices. Separate charges are possible due to the integrated software the
company uses. Each time a patient’s medical record is updated with a treatment the system
detects if this is a billable treatment, if so which doctor or service it should be billed to.

The radiology, pathology collection and chemist are all charged rent for the space used.
General Financial Characteristics and Accounting Policies

The following information is relevant to Universal Medical Centre (UMC) and should be
considered in conjunction with the financial statements that follow:

• December 31 balance day.

• The company uses FIFO

• Finance income is interest earned on bank accounts.

• UMC offers the same annual leave, sick leave and long service leave entitlements for
permanent staff. In addition, the company pays minimum superannuation as required
by law. All provisions are employee benefits related.

• Occupancy expenses relate to items such as contents insurance, water usage,

electricity, gas and cleaning.

• Other Current Assets include prepaid expenses and inventory paid for but not yet
received. All of these are not readily convertible into cash.

• Being a small proprietary company, they are not required to prepare financial reports
by the Corporations Act and thus are not required to be audited. The reports
provided are those lodged with ASIC and from their accounting software.

• All figures are in thousands (‘000)

• Shares were originally sold for $1 each, with all shares being ordinary shares.

• UMC uses the cost method to value their property, plant and equipment.

• UMC is asking for $5million for all their shares.

 Universal Medical Centre
Income Statement for the year ended 31st December

Year 2017 2016 2015 2014 2013

('000) ('000) ('000) ('000) ('000)

Service Revenue $8,026 $7,964 $7,368 $4,223 $1,824

Cost of Medical Supplies for service ($1,094) ($995) ($947) ($545) ($237)
Net Service Revenue $6,932 $6,969 $6,421 $3,678 $1,587

Equipment/Supply charges $571 $524 $397 $223 $97

Cost of Medical Supplies additional ($52) ($50) ($39) ($26) ($14)
Net Equipment/Supply charges $520 $475 $359 $197 $83

Nursing Revenue $864 $825 $806 $482 $236

Cost of medical supplies nursing ($127) ($117) ($106) ($62) ($30)
Net Nursing Revenue $737 $708 $700 $420 $206

Rent Revenue $861 $822 $789 $525 $257

Total Net Revenue $9,049 $8,973 $8,268 $4,820 $2,134

Expenses
Administrative ($351) ($345) ($242) ($163) ($69)
Depreciation ($314) ($200) ($101) ($47) ($19)
Occupancy ($330) ($304) ($269) ($152) ($55)
Employee Costs ($5,338) ($4,982) ($4,560) ($2,525) ($1,002)

Total Expenses ($6,332) ($5,831) ($5,172) ($2,888) ($1,145)

Earnings Before Interest and Tax $2,717 $3,142 $3,096 $1,932 $989

Finance income $39 $26 $18 $9 $1

Finance costs ($910) ($996) ($1,014) ($571) ($204)

Profit Before Tax $1,846 $2,173 $2,101 $1,370 $786

Income tax ($554) ($652) ($630) ($411) ($236)

Net Profit After Tax $1,292 $1,521 $1,471 $959 $550

 Universal Medical Centre
Balance Sheet as at 31st December

Year 2017 2016 2015 2014 2013

('000) ('000) ('000) ('000) ('000)
Current Assets
Cash and cash equivalents $136 $98 $72 $44 $23
Trade and other receivables (net) $51 $100 $54 $19 $56
Inventories $402 $357 $265 $149 $64
Other current assets $53 $50 $48 $21 $11
Total Current Assets $642 $605 $439 $233 $154

Non Current Assets

Property, Plant and Equipment (net) $12,392 $12,713 $12,917 $8,944 $5,686
Total Non Current Assets $12,392 $12,713 $12,917 $8,944 $5,686
Total Assets $13,034 $13,318 $13,356 $9,177 $5,840

Current Liabilities
Trade and other payables $183 $177 $169 $87 $41
Income Tax Payable $276 $155 $107 $55 $30
Provisions $11 $13 $12 $7 $4
Interest-bearing loans and borrowings $671 $810 $577 $393 $286
Total Current Liabilities $1,141 $1,155 $865 $542 $361

Non Current Liabilities

Interest-bearing loans and borrowings $8,263 $8,874 $9,254 $5,578 $2,491
Provisions $32 $36 $34 $21 $11
Total Non Current Liabilities $8,294 $8,910 $9,288 $5,599 $2,502
Total Liabilities $9,435 $10,065 $10,153 $6,141 $2,863

Net Assets $3,599 $3,253 $3,203 $3,036 $2,977

Equity
Contributed equity $2,100 $2,100 $2,100 $2,100 $2,100
Retained profits $1,499 $1,153 $1,103 $936 $877
Total Equity $3,599 $3,253 $3,203 $3,036 $2,977
 Universal Medical Centre
Statement of Cash Flow for the year ended 31st December

2017 2016 2015 2014

Operating activities
Receipt from customers $10,371 $10,089 $9,325 $5,490
Payments to suppliers ($7,340) ($6,876) ($6,206) ($3,510)
Interest received $39 $26 $18 $9
Tax paid ($433) ($603) ($579) ($386)

Net cash from operating activities $2,637 $2,636 $2,559 $1,604

Investing activities
Payments for PPE 0 0 ($5,087) ($3,877)
Proceeds from the sale of plant and equipment ($903) ($991) $0 $0

Net cash from investing activities ($903) ($991) ($5,087) ($3,877)

Financing activities
Dividend paid ($946) ($1,471) ($1,304) ($900)
Proceeds/(repayment) of borrowings ($750) ($147) $3,860 $3,194
Interest paid ($910) ($996) ($1,014) ($571)

Net cash from financing activities ($1,696) ($1,618) $2,556 $2,294

Net change in cash $38 $26 $28 $21

Cash and cash equivalents at start $98 $72 $44 $23

Cash and cash equivalents at end $136 $98 $72 $44

Key points from the notes to the financial statements and other key issues

• Universal Medical Centre (UMC) only uses Historical Cost Accounting for recording the
value of PPE, and uses the following useful lives:

o Building 40 years
o Fittings and medical equipment 2-10 years

• Doctors, allied health providers and nursing services are billed on the first of the month
and are given until the end of the month to pay.

• Rent revenue is directly deposited on the last day of the month.

• UMC employs a mixture of full time staff and casual staff, however due to the uncertainty
facing the company, in the last few years all new staff have been casual.

• The creditors of UMC's parent company, who are also the creditors of UMC, have only
agreed to the sale on the conditions that UMC’s debt ratio remains below 75%, based on
market value. Furthermore, all future financial statements are audited. Loan documents
have been amended to reflect this and a breach of these conditions will result in all loans
being payable within 30 days.

• As part of the liquidation process all non-current assets were tested for impairment, no
assets were deemed impaired based on value in use. It was noted that most of the assets
of the business were specialised to the medical industry, including the building that was
purpose-built as a medical clinic. As such in the event of needing to sell these assets it
would be difficult to find a buyer, reducing the market value of these assets. Much of the
building for example, would need extensive renovation before being able to be used for
another purpose.