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Menotomy Community Hospital (A)
Author(s):
Young, David W.
Functional Area(s):
   Finance/Financial Management
   Financial Accounting
Setting(s):
   Healthcare Management
Difficulty Level: Beginner
Pages: 4
Teaching Note: Available. 
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First Page and the Assignment Questions:
    In November 2003, Stephen Holmes, M.D., President of Menotomy Community Hospital (MCH), was preparing a loan request to go to the Norten Municipal Bank. Less than eight months earlier, MCH had expanded its staff by 30 percent. At that time, the hospital had been in a secure financial position and Dr. Holmes, anticipating no financial problems, had spoken to the hospital’s board of directors in favor of the staff increase. However, in July, Dr. Holmes realized that although MCH had begun training and paying the new staff in June, the hospital would not receive the additional revenue generated by these new staff member until later in the fiscal year.1

    Faced with this unexpected shortfall, Dr. Holmes had gone to the Norten Municipal Bank in July 2003 to apply for a short-term line of credit to cover the additional costs. George Watson, the bank officer, had granted MCH a line of credit, which had reached over $650,000 by September 2003. Although he had allowed the hospital to continue using its line of credit into its next fiscal year, he had raised some important considerations.

    He explained that the bank was willing to continue a line of credit for the hospital but he was concerned that Dr. Holmes had not adequately forecasted the hospital's financial future. He asked Dr. Holmes to provide the bank with a set of pro-forma (i.e., forecasted) financial statements for fiscal year (FY) 2004. Consequently, Dr. Holmes began to review the hospital's financial statements for the past three years (contained in Exhibits 1 and 2) and to collect data that would help him forecast similar statements for FY2004.

BACKGROUND

    Menotomy Hospital was a small private hospital founded in 1985 by four retired physicians. Each founder had between 10 and 35 years of experience working with elderly patients. Realizing that a majority of their patients would not need to travel long distances for hospital care if Norten had a hospital, the physicians had obtained $2.7 million in contributed capital from several investors, and had started their own hospital. . . .

Assignment

1.    Prepare a pro forma income statement and balance sheet for FY2004. To do so, assume that the ending balance in the line of credit will be $1,099,130 .

2.    What do these statements tell you about the operations of MCH?