Question

List the 3 financial statements used in financial accounting. Discuss the importance of these financial statements. Why do we use these? Who are the users of this information? Discuss how a healthcare manager might use each one. In your opinion, do you feel that one is more important than another? Why or why not? What would happen if we didn't have these types of tools?

Answer 1

Financial Statements

1. Income Statement

Income Statement is one of the three important financial statement prepared by the company for each period. The purpose of the income statement is to determine the financial performance of the organization over a particular period. The income statement is also called ‘Profit and Loss account’ or ‘the statement of Revenue and Expenditure’.

• Income statement is focuses on revenue and expenses of the company for the period.
• Income statement is prepared for a particular period not at a particular date.
• It contains revenues, expenses, gains and losses
• The first part of the statement is to determine the gross income and the second part is to determine the net income.
• There are ‘Single-Step Income Statement’ and ‘Multiple-Step Income Statement’.
• Potential investors are interested in their profit the security of their investment.

2. Balance Sheet.

Balance sheet is a report of the company’s assets, liabilities and owner’s equity at a particular date. It is a positional statement which shows how much company owns, owes and the balance of stockholder’s equity.

• Balance sheet is two sided statement, all assets are in one side and all liabilities plus stockholder’s equity on the other side. ( Assets = Liabilities + Stockholder’s equity )
• All the assets are listed in this statement based on its liquidity either current assets or long-term assets.
• Long-term assets includes long-term investments, fixed assets and intangible assets.
• Liabilities are the money that company owes to outsiders.
• Current liabilities are the liabilities to be paid before the end of next year and long-term liabilities are the long debts.
• Balance sheet is always compare with previous period as well as with other business in the same industry.
• A number of ratios such as Debt-Equity ratio, Current Ratio, liquidity ratio, Return on Investments are calculated based on the data in balance sheet.
• The primary users of balance sheet are Management, Competitor, Customers, Employees, Government, Investors, Lenders etc..

3. Cash Flow Statement

The statement of cash flow or the cash flow statement is an important report in the financial statement that summarizes the inflow and outflow of cash and cash equivalents. It is a complement statement of balance sheet and income statement.

• Cash flow statement manages the cash position of the company.
• Cash flow statement is helps the investors, where the money is coming from and where it goes.
• There are there components in the cash flow statement, 1. Cash from operating activities   2. Cash from investing activities. 3. Cash from financing activities.
• Cash flow is calculated by making certain adjustments to net income by adding and subtracting revenue, expenses and credit transactions.
• There are two methods in preparing cash flow statement, Direct Method and Indirect Method.
• Cash Flow Statement is a valuable measure of strength, profitability and long-term future outlook for a company.