Mid Del Therapeutic Center, Inc. - Page 14




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            Accounting Issues–Background                                                               
                  It is a customary and accepted practice in the health care                           
            industry for health care practitioners to use the cash method of                           
            accounting.  PC used the cash method of accounting for both                                
            income tax purposes and for bookkeeping purposes and consistently                          
            reported the drugs used in patient treatments as supplies and not                          
            as inventory.  With the exception of its Federal income tax                                
            return for 1993, Mid-Del used the cash method of accounting for                            
            income tax purposes and consistently reported the drugs used in                            
            patient treatments as supplies and not as inventory.  Mid-Del                              
            used the accrual method of accounting for bookkeeping purposes.                            
                  PC reported the following gross receipts, direct costs                               
            associated with patient treatments, and gross profit for the                               
            taxable years ending April 30, 1993, 1994, and 1995, using the                             
            cash method of accounting:                                                                 


             TYE      Gross       Other costs  Gross      Medical supplies and Medical                 
                      receipts1                profit     drugs included in    supplies and            
                                                          other costs          drugs as a              
                                                                               percentage of           
                                                                               gross receipts          
                                                                                                 
             04/30/93 $1,519,988  $425,554     $1,094,434 $183,136             12                      
             04/30/94 2,106,670   454,982      1,651,688  367,793              17                      
             04/30/95 2,100,440   513,006      1,587,434  451,976              22                      
            1 Net of returns and allowances.                                                           









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