Role Of A Financial Statement On The Performance And Cash Flow Of An Organization

To analysis financial statements there are various tools. Ratio analysis is one of them. In ratio analysis we establish relationship between two or more items of financial statements and derive some vital information about the business.

Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories,

Again, financial statements are effective tools in helping organizations determine their financial positions in the health care industry. The use of balance statements help determine the amount of assets, liabilities, and equity over long term, while statements of revenue and expenses provides an overview of profits minus expenses short term. In the case of Patton Fuller Community Hospital, per the admission of the CEO, the facility suffered a financial loss; however, with patient net revenue up, they expect future financial statements to show a continued profitable

Understanding the finances of a company is important but knowing the significance of the financial statements is crucial to the operations as well. Reviewing the statement of financial position, operating statement and statement of cash flows serve as a guidance to management and executives on the day-to-day activities of an organization (Finkler et al., 2013). For example, the statement of financial position (balance sheet) shows the assets and

Net income is not a sufficient indicator of the financial health of an entity. It only serves as a basis of allocation of expenses from the revenues that are generated for a certain financial period. It involves “noncash expenses,” specifically “depreciation and amortization of intangible assets” that reduces its value, but have no effect on the net cash flows of the business. It also differs with cash flow under the context of timing of revenue and expense versus the actual “occurrence” of cash flows (Williams, et al.). There are other considerations that must be probed at, such as the procurement of funds from credit facilities, the ability to pay short-term and long-term financial obligations, distribution of annual dividends, cash inflow and outflow from operating, financing and investing activities. Along with the income statement, balance sheet and critical analysis of several factors, the use of cash flow statement of the company serves an important indicator of the financial health and continuous operations of the business.

Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories,

Examining financial ratios for a particular period of time can be used to identify unusual changes thus alerting the management on the progress of the business venture. Financial ratios are also helpful in carrying out financial analysis and forecasting. They also allow the owner of the business and the entire management to come up with business specific goals that can easily be traced to determine the company’s progress towards achieving them.

Financial ratios are calculation of numbers from the financial statements for a comparative analysis. A ratio in and of itself has little meaning but as a tool of comparison, internally, it reflects the company’s performance year to year, or externally comparing other organizations’ performance within the same industry. Ratios help to determine the company’s strengths, weakness, and risk. Credit analysis and investors also rely heavily on ratios (Baker & Baker, 2014).

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Throughout the entirety of the paper I will discuss the purposes of the income statement and the balance sheet; while also identifying the major types of expenses shown on the income statement, and listing major types of assets inside the typical balance sheet. I will also discuss the three different accounts that comprise the owner’s equity on a corporate balance sheet and the three categories of ratios that a business may use in an analysis of its financial statements. Lastly I will explain a statement of cash flows and describe the three standard sections contained in cash flow statements. Since I will be discussing multiple categories, I want to clearly state each one by dividing them into separate sections. Each topic holds dominant relevance to finance and the ability to fully understand a business by comprehending how they work. Having the ability to understand the data projected from a business, is the bone structure for seeing how it grows or regresses. To aid in this understanding I would like to first start off with the income statement.

Ratio analysis is used to evaluate relationships among financial statement items. The ratios are used to identify trends over time for one company or to compare two or more companies at one point in time. Financial statement ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency.

The main objectives of financial statements are to help managers of an organization to determine whether decisions about funding were most appropriate, and thus determine the future of investments. Understand the elements that can be used to compare financial ratios and different analysis techniques that can be applied within a company. Describe some of the measures that should be considered for decision-making and alternative solutions to the various problems affecting the company, and help planning the direction of investments made by the organization. Using the most common reasons to analyze liquidity and activity of a company. Analyze the relationship between debt and financial leverage presenting the financial statements. Assess profitability. Determine the position held by the company in the competitive market in which it operates. Provide employees with enough information they need to keep them informed about the situation under which the company works. Financial statements are very useful to compare the current status of different companies in the market. By

Ratio analysis is generally used by the company to provide some information on how the company has performed during that year, so that the parties involved including shareholders, lenders, investors, government and other users could make some analysis before making any further decision towards that particular company. As mentioned by Gibson (1982a cited in British Accounting Review, 2002 pg. 290) where he believes that the use of ratio analysis is such an effective tool to evaluate the company’s finance, and to predict its future financial state. Ratios are simply divided in several categories; these are the profitability, liquidity, efficiency and gearing.

According to Drake (2010), financial statement analysis is the selection, evaluation, and interpretation of financial data, along with other pertinent information, to assist in investment and financial decision-making. Moreover, it is also the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. Brigham, E., & Houston, J. (2007), “Financial statements report both a firm’s position at a point in time and its operations over some past period. However, their real value lies in the fact that they can be used to help predict future earnings and dividends”. Financial ratios are designed to help one evaluate a financial statement.

Ratio is one of several measurements to analyze the managing of the financial affairs of an organization. Ratio is simply relationship between two financial balances or the financial calculations. This relationship establishes organization’s references so business can understand how well they are performing financially. Thus, by applying ratio analysis to a set of financial statements, organization can better understand its financial performance.