Assessing Medical Practices
Q: On a smaller medical group, one that doesn't produce a reviewed financial statement, what is the risk in using their cash basis tax returns?
A: The risk in using either cash based or accrual based tax returns to evaluate a credit is that the balance sheet and the income statement in all tax returns are not computed on the same basis.
The balance sheet in all tax returns is compiled according to GAAP while the income statement is prepared according to the tax code. Therefore they are not compatible.
One must either get an accrual income statement or convert the tax based income statement to an accrual based income statement in order to properly analyze a credit.