Question

In: Finance

Module 6: Financial Statements For your post this week, I want you to discuss the importance...

Module 6: Financial Statements

For your post this week, I want you to discuss the importance of financial statements to managers, and to outside parties. Also, I would like you to explain the difference if the hospital is a for-profit, or not-for-profit organization.

  • Write a minimum of 250 and a maximum of 300 words.

Solutions

Expert Solution

Financial statements are written records that reflect the business activities and the financial performance of a company. Financial statements are audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, investing or corporate governance purposes. All publicly traded companies and large private entities prepare financial statements periodically. Financial statements include:

  • Balance sheet
  • Income statement
  • Cash flow statement.
  • Fund flow statement

Importance of financial statements to managers

  1. The purpose of creating financial statements is to capture a company’s financial position for a given period. This allows managers to analyze and compare the health of one company to another.
  2. Financial statements provide assessment of a company’s profitability, liquidity and operational efficiency. Managers use the booked transactions to monitor measurements like debt leverage, costs, sales, assets and liabilities. Financial statements help managers assess achievement of financial goals.
  3. Managers analyze competitors' financial statements and compare them to internal finances. This is useful in developing strategies. Benchmarking financial performance relative to the market competition allows mangers to identify areas of competence or weakness.
  4. Companies engaged in mergers and acquisitions analyze financial statements to help determine a prospective investment’s value.
  5. Companies also invest in stock to earn interest on unused cash. Financial statements can be used to help identify undervalued companies.
  6. The balance sheet shows the position of assets, liabilities, debt, equity and stock of a company.The management should compare the statement with the previous periods and check for major ups and downs  For instance, on the assets side, if inventories are growing faster than sales, the management could look for ways in which inventories can be converted into sales more quickly.
  7. The income statement reveals trends in both sales and expenses so that the business can take decisions for better operation and growth. The management should compare sales and expenses from one period to the previous period.
    The notable expenses are research & development and the interest paid on borrowed funds. If the latter is high, the company could look at other cheaper sources for funds.
  8. Cash flows are helpful in determining money available to pay creditors. Usually an increasing cash flow from operating activities would indicate a healthy cash flow situation for the company.
  9. Statement of Stockholders’ Equity provides information about stockholders’ equity balances as listed on the balance sheet, with explanations on why these items changed. The management should keep reviewing dividend payments and retained earnings. If retained earnings are decreasing, the management should check whether it has sufficient funds for paying off its liabilities.
  10. Statement of Comprehensive Income provides information about comprehensive income items which cannot be included in the income statement, such as unrealized gains/losses, pension, investments and foreign currency transactions. It would help the management determine possible sources of cash in future.

Importance of financial statements for outside parties

  • Credit Risk Management - Lenders providing loan or trade credit will analyze financial statements to determine the credit worthiness of the firm. Banks and financial institutions evaluate financial statements to approve loans. These loans may include ratio covenants based on annual statements as a condition to the loan agreement.

  • Shareholders use Financial Statements to assess the risk and return of their investment in the company and take investment decisions based on their analysis.

  • Prospective Investors need Financial Statements to assess the viability of investing in a company. Investors may predict future dividends based on the profits disclosed in the Financial Statements. Also, risks associated with the investment may be identified from the Financial Statements. For instance, fluctuating profits indicate higher risk.

  • Suppliers need Financial Statements to assess the credit worthiness of a business and ascertain whether to supply goods on credit and also to determine on the terms of credit.

  • Customers use Financial Statements to assess whether a supplier has the resources to ensure the steady supply of goods in the future. This is especially vital where a customer is dependant on a supplier for a specialized component.

  • Competitors compare their performance with rival companies to learn and develop strategies to improve their competitiveness.

  • Governments require Financial Statements to determine the correctness of tax declared in the tax returns. Government also keeps track of economic progress through analysis of Financial Statements of businesses from different sectors of the economy as well as govts. can see whether the cos. are adhering to corporate governance regulations.

  • General Public may be interested in the effects of a company on the economy, environment and the local community.

The difference if the hospital is a for-profit or not-for-profit organization

Although nonprofit and for-profit hospitals are fundamentally similar, there are significant cultural and operational differences, since, for-profit hospitals have to generate return for investors.

  • Nonprofit hospitals are community-oriented institutions, driven by mission rather than shareholder returns.
  • For-profit hospitals must balance community service with shareholder returns; based on operational efficiencies management decisions are made.
  • Nonprofit hospitals tend to plan for continued viability over the long-term; for-profit hospitals are concerned with quarterly returns & make short-term decisions that may not align with the needs of the communities they serve.
  • Nonprofit hospitals, viewed as charities by the Internal Revenue Service don’t pay federal income or state and local property taxes. In keeping with their charitable purpose and community focus, nonprofit hospitals are often affiliated with a particular religious denomination.
    For-profit hospitals are owned either by investors or the shareholders of a publicly traded company.
  • For-profit hospitals tend to serve lower-income populations, while Nonprofit hospitals tend to be located in communities with less poverty, higher incomes, and fewer uninsured patients.

  • One important difference in nonprofit and for-profit hospitals is that for-profits allocate more resources to advertising and marketing.

  • With positive financial performance among the primary goals of shareholders and the top executive leadership, operational discipline is one of the distinguishing characteristics of for-profit hospitals.

  • The executives of for profit hospitals are accountable for financial performane of the hospital. For-profit hospitals routinely utilize monetary incentives in the compensation packages of the doctors.
    In contrast to offering generous incentives that reward robust financial performance, for-profits do not hesitate to cut costs in lean times.

  • When healthcare providers negotiate managed care contracts, for-profits have a bargaining advantage over nonprofits. In managed care contracts, for profits look for leverage and nonprofits look for partnership opportunities. For profits can negotiate more efficiently.


Related Solutions

This week, your book discussed the importance of financial statements. For your post this week, I...
This week, your book discussed the importance of financial statements. For your post this week, I want you to discuss the importance of financial statements to managers, and to outside parties. Also, I would like you to explain the difference if the hospital is a for-profit, or not-for-profit organization. Write a minimum of 250 and a maximum of 300 words.
Last week I compared 6 compound bows, this week I want to see if the mean...
Last week I compared 6 compound bows, this week I want to see if the mean price for a compound bow is less than the mean price of a crossbow. I looked at 6 manufacturers of compound bows with prices of, 1,100, 1,000, 1,149, 999, 1100, 999. I looked at 6 different crossbow manufacturers and they were priced, 949, 1,399, 1,499, 1,099, 999, 1,019. Test with a 0.05 significance level.
Both Module 4 and Chapter 6 discuss the importance of two elements of a direct approach...
Both Module 4 and Chapter 6 discuss the importance of two elements of a direct approach message: a specific subject line that summarizes the message a clear message purpose or main point in the first sentence(s) This week, when you write emails, practice writing subject lines and message openings that follow the guidelines in the textbook and the Module. Then, post the subject line and first few lines of an email you wrote -- either a request, or a reply...
This week you started reading Module 6 and you were introduced to the concept of payback....
This week you started reading Module 6 and you were introduced to the concept of payback. Explain some of the potential pitfalls of using payback period in evaluating an investment decision. Some things to consider as you answer include these questions. Does the interest rate play a role? Why would a company choose payback over something like net present value in making a decision? What are the problems that are created in having so many options available to decision makers?
Explain and discuss the importance and the role of the related notes to the financial statements...
Explain and discuss the importance and the role of the related notes to the financial statements included in a financial statement
In your own words discuss your understanding of health and its importance. those post should be...
In your own words discuss your understanding of health and its importance. those post should be atleast 300 words
Discuss the importance of the common-size financial statements in strategic evaluation and control process.
Discuss the importance of the common-size financial statements in strategic evaluation and control process.
i want you to focus your discussion around one particular chronic health issue this week obesity....
i want you to focus your discussion around one particular chronic health issue this week obesity. so as the administrator of a community health center, your board chair would like for you to create a new low cost health initiative that will improve the health of the county's residents, who are under the age of 18 who are dealing with obesity. describe the program you would like to create.
Please answer the list of questions below: 1. Discuss the importance of financial statements and how...
Please answer the list of questions below: 1. Discuss the importance of financial statements and how they are used by businesses. 2. What is the basic format of the income statement and what is the relevance of the basic categories? 3. Cash flows for an organization come from operating activities and investment activities. Discuss the importance of each to the organization. 4. The Happy Auto Shop has the following annual information: Gross Sales $700,000 Net sales $696,000 Gross profit $448,000...
Whats the treatment in financial statements as per IAS33? Critically discuss the importance of diluted EPS...
Whats the treatment in financial statements as per IAS33? Critically discuss the importance of diluted EPS reported in financial statements and how they arise.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT