Financial statement analysis is imperative in an organization in ensuring financial success of the organization. Financial statements in health institutions are essential in comparing the performance of the organization in a particular period with other periods. In addition, the analysis is essential in comparing the performance of the organization with other institutions and organization operating in the same industry. Various financial statements are essential in ensuring analysis of the financial performance of the organization. These include the balance sheet, income statements for organizations operating as for profit organization, statement of operations for non-for profit organization, the cash flow statement and the statement of changes in equity. These financial statements provide data on performance of the organization (Nowicki, 2011).
Financial ratios are essential in evaluating and analyzing the performance of the organization, which provide information of the various aspects of the organization. There are various types of ratios in financial statement analysis, which are used in analyzing the various aspects of financial performance of the organization. For example, the liquidity ratios are used to evaluate whether the organization will be able to finance its financial obligations when due. Liquidity ratios are also essential indicators of whether the organization has increased its working capital, such as bad debts or the clerical costs. These ratios are essential in evaluating how well the organization is able to manage its working capital as well as its debt. If the liquidity ratios are low, it is an indication that the organization will not be able to finance its short term obligations when they are due. Financial providers will avoid issuing more debt to finance the activities of the organization with high liquidity ratios (Courtney & Briggs, 2004). Therefore, the production and capacity expansion of the organization may be hindered. Liquidity ratios include the debt/equity ratio and quick ratio among others.
Profitability ratios are used to evaluate and analyze organization profitability. These include the margin and the mark-up ratios. In health institutions, high profitability ratios are indicators that the organization is able to provide health services at low cost. In addition, high profitability ratios are essential indicators of good management policies in such organizations. They are also indicators of efficiency in the organization operations, such as provision of quality, timely and sufficient health services, which lead to increased sales. These ratios are compared with the ratios of previous periods and the ratios of the industry in analyzing the profitability of the organization (Cimasi, et al, 2004).
Asset efficiency ratios are also referred to as turn over or activity ratios. They indicate how well a health institution is able to increase its health services provision hence increasing it profits. These ratios include the inventory turnover ratios, total assets turnover ratios and account receivable turnover (Cimasi, et al, 2004). In a health institution, this ratio can be low if the institution has been purchasing too much equipment than necessarily required for the organization operations. It can also be low if an institution has obsolete equipments, which are currently rarely used in the health services provision.
Capital structure ratios also referred to as leverage ratios indicate the composition of an organization capital structure. These include ratios such as the debt/equity ratios and interest coverage ratios. If the ratios are high, it is an indication that the organization has many debts, which may affect the operations of the organization. High capital structure ratios also indicate that the organization may fall under a legal obligation, since it is required to pay its interest whether it is making loses or profits. Incorporated health institutions with high leverage ratios may experience a drop of its shares prices. This because investors are concerned about the organization risks associated with high debt level in the capital structure of the organization (Courtney & Briggs, 2004).
There are various limitations of using ratios in analyzing organization financial statements. Ratios are computed using historical information, which might not reflect the current situation of an organization. In addition, organizations have different definitions for different items used in computation of the ratios. The industry ratio, which forms the basis upon which an organization compares its ratios with that of the industry, may not always be available. Financial statements are also based various estimates and assumptions of financial statement, which impairs comparability (Nowicki, 2011). For profit and, non-profit health organizations have slightly different financial ratios, since they do not compute profitability ratios. In addition, for profit health institutions are required to comply with all federal tax requirements, whereas non-profit organizations have few tax obligations.
Financial statement analysis plays an integral role in ensuring the financial success of the organization. Various financial statements are used in the provision of data used in financial statement analysis these include the balance sheet and income statement. These ratios provide financial managers with important information regarding an organization financial performance. B. Zion Health Care liquidity ratio has been improving from 2010 to 2011. The current ratio improved from 1.6 in 2010 to 1.95 in 2011. This shows that the organization will be able to meet its short term financial obligations. The profitability ratios indicate the ability of the organization to remain in operations, while asset efficiency ratios ability of the organization to utilize its assets in revenue generation. Statement of cash flows explains the revenues and expenditures of the organization. It contains the cash flow from operating activities, investing and financing activities. Accountable Care Organization can cause difficulties in comparing financial ratios. Health professionals from different hospitals and clinics treat financial assets differently causing the disparity in use of financial ratios.
Financial statement analysis is essential in an organization, in facilitating allocation of funds for the external and internal activities. There are three steps in financial analysis, which include determination of facts and data about the organization (Cimasi, et al, 2004). The second step includes comparison of the financial statement with those of other organizations in the industry and the last step includes use of professional perspective and decisions concerning the comparison made. Financial statements such as the balance sheet and the income statements provide data and information used in financial statement analysis. There are four types of financial ratios, which include liquidity ratios, profitability ratios, asset efficiency ratios and capital structure ratios. Non for profit health organizations are less concerned about their profitability, since if they are motivated by profits they could attract criticism from the community (Nowicki, 2011). The median value is preferred over the mean since it does not take into account of the skewed values which might distort the results.
Place This Order or a Similar Order With Us Today and Get An Amazing Discount!
Place your order now with Reliablepapers.com and experience the difference of letting the professionals do the work for you!
Our Process is Simple!
Give Us Your Requirements
Pay & Place Your Order
Receive Your Custom-Written Paper
Is this the question you were looking for? If so, place your order here to get started!