Question

Financial accounting involves identifying, measuring, recording, and communicating in dollar terms the economic events and status of an organization. This is typically done through the use of 3 financial statements. These 3 statements are used to summarize the organization's financial status and performance. This is key to the survival of most healthcare organizations today. We have to know how much money we made and how much we spent. 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

A. The three statements used in financial accounting are:

Profit and Loss Statement (Income Statement)

Balance Sheet

Cash Flow Statement

B., C. The importance and uses of these statements are as follows:

1. Income Statement: It helps a company understand the amount of revenue generated, the amount of operating and non operating income and expenses, the contribution margin (Revenue - Variable Costs). It gives a summarised view of the operating costs of the company. It is used for tax computation purposes, ratio analysis, trend, comparative and common size analysis.

2. Balance Sheet: This is a snapshot of the company's finances. The balance sheet provides a bird eye's view of the assets and liabilities of a company. It helps both the internal and external stakeholders understand the sources of funds, and the deployment of funds in an enterprise. It is used for ratio analysis, comparative and common size analysis and firm valuation.

3. Cash Flow Statement: It is a statement of the cash inflows and outflows during a particular period. There are three types of activities which account for cash flows : operating, financing and investing activities. This statement helps understand the liquidity position of a company. It is used for ratio analysis and estimating the working capital requirements of a company.

D. The users of these financial statements are; investors, management, suppliers, creditors, government and regulatory bodies, potential investors, competitors, banks and lending institutions, private lenders, etc.