Financial statements are important because they are the means by which financial managers track their organizational performance, identify problems, and make corrective action. The most important financial statements are the balance sheet, income statement, and the cash-flow statement. Ratio analysis is the means by which we use information contained within these three reporting mechanisms to understand the dynamic interrelationships and make decisions.
A balance sheet is nothing more than a list of the accumulated assets and liabilities. The income statement tells us, “How did we do?” and the cash-flow statement tells us where our money went. Although each financial statement is a separate reporting tool, keep in mind that they that they are all related. The changes in assets and liabilities that you see on the balance sheet are also reflected in income statement. Cash flows provide more information about cash assets listed on a balance sheet and are related to, but not exactly the same thing as, the net income found on the income statement.
No single financial statement tells the complete story. The information contained in all of these statements is important to know; however they do not by themselves give us a full picture of what is going on. We need to be able to look at each of these documents within the context of each of the other statements. Understanding the interactions and performance according to the financial statements provides us with a retrospective of what has happened in the past. We can then use that information to extrapolate what we believe will happen in the future. It allows us to forecast and (if we do a good job understanding all the variables at play) make changes to achieve the organizations strategic aims. History is only helpful to the degree it allows us to understand our future.
Having a good forecast in place will make it possible to check our actual performance against our plan (remember the variance analysis that you did last week). You should also be able to figure out what went wrong and how to correct any problems.
To prepare for this Application Assignment, review Chapters 10 and 11 from your Penner text and this week’s Learning Resources.
To complete this Application Assignment, write a 2- to 3-page paper that provides a detailed explanation of each of the following four documents commonly found in financial reports. Provide examples of how these documents would be utilized by a health care manager.

Balance sheet
Income statement
Cash flow statement
Ratio analysis

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Your written assignments must follow APA guidelines. Be sure to support your work with specific citations from this week’s Learning Resources and additional scholarly sources as appropriate. Refer to the Essential Guide to APA Style for Walden Students to ensure your in-text citations and reference list are correct.
Chapter 2, “The Balance Sheet”The balance sheet presents the financial picture of an enterprise at the moment it is written. It presents the basic equation of accounting showing what you owe (your liabilities) plus the value to owners (the worth) adding up to your assets (what you have). This chapter shows the basic elements of the typical balance sheets. The balance sheet reflects the strength of an organization. It is an X-ray of a hospital’s financial interior. From the balance sheet we find current cash on hand and the current ratios and identify surpluses that can feed into the investment portfolio. Health care organizations may borrow money to buy expensive capital (X-ray machines, hospital buildings, labs), pay employees, and fund organizational growth.

Chapter 3, “The Income Statement”Income statements report on the making and selling activities of a business over a period of time. In this chapter, you will learn the elements of the income statements. These demonstrate the profitability of a business. Profitability is an indicator of the future of the organization. You have to take in more than you pay out in order to be self sustaining. Even more important is the organization’s ability to grow itself to maintain market share and position within the community. Health care is very dynamic. Improvements are always being made, so new equipment, technologies, and facilities have to be acquired. To do so, the health care organizations must draw upon retained profits.

Chapter 4, “The Cash Flow Statement”A cash flow statement tracks the movement of cash through a business over a period of time. This chapter addresses the concepts of cash and non-cash transactions, the sources of cash, the way cash is disbursed, and other elements of cash flow. Payments received from clients/patients are almost always after services are rendered, so the challenge is maintaining enough cash on hand to meet your current obligations (payroll, supplies, heat, electricity, etc.) After all, no one would want the electricity or water turned off in the middle of an operation because the hospital didn’t have cash to meet the utility bills this month.

Chapter 13, “Ratio Analysis”The relationship between the sales, costs, expenses, and assets are important to understanding the financial condition of a business. This chapter explains the ratio analysis useful in analyzing the year-to-year performance of a single company or for comparing several companies within an industry. In health care, third-party payers often provide the funds to pay for health care services. These insurance companies negotiate fees and payment schedules resulting in a complicated environment in which negotiated prices do not necessarily reflect actual costs.

Various expenses are added in to create the cost for a particular health care service or product. For instance, the cost of providing a flu shot is made up of several expenses including the vaccine, labor, insurance, bandage to put over the immunization site, alcohol swab, gloves—and the list goes on. Ideally the price of the shot should include total costs plus a profit. Some negotiated rates may be more or less than the price of the shot thus the provider may make money or lose money for this particular service. If it is a loss then hopefully the organization makes up for it in other ways, such as a pharmacy that offers the shot at a loss but makes up for it in terms of sales of candy bars and aspirin. The ratio analysis to examine the aggregate of all these inputs, as illustrated in the financial statements, provides a one-number indicator that will help us understand our financial position.
Required Media
Investopedia. (n.d.). An introduction to the balance sheet [Online video]. Retrieved April 4, 2011, from

This video explains how the balance sheet helps health care organizations and even individuals keep track of their net worth.
Optional Resources
Doody, D. (2006). The balance sheet: A snapshot of your financial health. hfm (Healthcare Financial Management), 60(5), 124–125.

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