Question

Lost four major financial statements and describe their major components. which stsrement are intended for internal audiences?

what are generally accepted accounting primciples (GAAP)? How are they used?

what are the four classifications of ratios and what do they measure?

why must the business of healthcare keep in touch with the human side of healing?

Answer 1

Answer :

1.  A complete set of financial statements is used to give readers an overview of the financial results and condition of a business. The financial statements are comprised of four basic components, which are as follows:

• Income statement. Presents the revenues, expenses, and profits/losses generated during the reporting period. This is usually considered the most important of the financial statements, since it presents the operating results of an entity.

• Balance sheet. Presents the assets, liabilities, and equity of the entity as of the reporting date. Thus, the information presented is as of a specific point in time. The report format is structured so that the total of all assets equals the total of all liabilities and equity (known as the accounting equation). This is typically considered the second most important financial statement, since it provides information about the liquidity and capitalization of an organization.

• Statement of cash flows. Presents the cash inflows and outflows that occurred during the reporting period. This can provide a useful comparison to the income statement, especially when the amount of profit or loss reported does not reflect the cash flows experienced by the business. This statement may be presented when issuing financial statements to outside parties.

• Statement of retained earnings. Presents changes in equity during the reporting period. The report format varies, but can include the sale or repurchase of shares, dividend payments, and changes caused by reported profits or losses. This is the least used of the financial statements, and is commonly only included in the audited financial statement package.

Balance Sheet are intended for internal audiences.

2. Generally accepted accounting primciples (GAAP)

Generally accepted accounting principles (GAAP) refer to a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the United States must follow GAAP when their accountants compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP aims to improve the clarity, consistency, and comparability of the communication of financial information.

They are used by -

Accountants apply GAAP through FASB pronouncements called Financial Accounting Standards (FASs). Although the rules found in the formal pronouncements of the FASB and its predecessors are the main sources of GAAP, GAAP rules are also found in statements from the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants; pronouncements by expert accountants; and other practices that are not found in formal pronouncements but are generally accepted because they represent a common practice in a particular industry.

3. The four classifications of ratios and what do they measure are as follows -

1. Liquidity and the Current Ratio

The most common liquidity ratio is the current ratio, which is the ratio of current assets to current liabilities. This ratio indicates a company's ability to pay its short-term bills. A ratio of greater than one is usually a minimum because anything less than one means the company has more liabilities than assets. A high ratio indicates more of a safety cushion, which increases flexibility because some of the inventory items and receivable balances may not be easily convertible to cash.

2. Solvency Ratios and Financial Stability

Solvency ratios indicate financial stability because they measure a company's debt relative to its assets and equity. A company with too much debt may not have the flexibility to manage its cash flow if interest rates rise or if business conditions deteriorate.The common solvency ratios are debt-to-asset and debt-to-equity. The debt-to-asset ratio is the ratio of total debt to total assets. The debt-to-equity ratio is the ratio of total debt to shareholders' equity, which is the difference between total assets and total liabilities.

3. Profitability Ratios and Margins

Profitability ratios indicate management's ability to convert sales dollars into profits and cash flow. The common ratios are gross margin, operating margin and net income margin. The gross margin is the ratio of gross profits to sales. The gross profit is equal to sales minus cost of goods sold.

4. Common Efficiency Ratios

Two common efficiency ratios are inventory turnover and receivables turnover. Inventory turnover is the ratio of cost of goods sold to inventory. A high inventory turnover ratio means that the company is successful in converting its inventory into sales.

The receivables turnover ratio is the ratio of credit sales to accounts receivable, which tracks outstanding credit sales. A high accounts receivable turnover means that the company is successful in collecting its outstanding credit balances.