Question: 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 complete this Application Assignment, write a 2 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.
1. Balance sheet
2. Income statement
3. Cash flow statement
4. Ratio analysis
Your written assignments must follow APA guidelines. Be sure to support your work with specific citations.