Understanding basic accounting principles is imperative to the health care manager role.
Understanding basic accounting principles is imperative to the health care manager role. Reading a balance sheet and recognizing the importance of cash flow are skills that are compulsory to this function. With this in mind, discuss the following:
Discuss the most important headings in a balance sheet and what the summary numbers mean.
Explain 4-5 reasons why cash flow is important to a health care organization.
Use 2 references to validate your response. Validation means that references have been used to prove your assertions and statements. Academic work is not what is thought to be true, but is what is researched to be true.
Responses to Other Students: Respond to at least 2 of your fellow classmates with at least a 100-word reply about their Primary Task Response regarding items you found to be compelling and enlightening. To help you with your discussion, please consider the following questions:
What did you learn from your classmate’s posting?
What additional questions do you have after reading the posting?
What clarification do you need regarding the posting?
What differences or similarities do you see between your posting and other classmates’ postings?
Financial statements present the financial health of an organization. Financial statements are periodically prepared by accountants from the enterprise resource planning (ERP) system. Generally, this means monthly, quarterly, and annually. External parties are primarily concerned with financial statements because this is their only source of information. External parties include stockholders, creditors, suppliers, employees, customers, and government agencies. Each party uses the financial statements to understand the financial health of an organization and how profitability has been in the past. Parties want to know how a company acquires and spends cash. These are just some of the issues that can be addressed through examination of the financial statements.
Typically, financial accountants (also called external reporting) prepare three main statements–the balance sheet, the income statement, and the statement of cash flows.
The Balance Sheet
First, the balance sheet (e.g., the statement of financial position) presents a list with values of what an organization owns (called assets), what an organization owes (called liabilities), and the difference between what the organization owns and owes (called equity). A typical organization has assets that include cash, accounts receivable (what is owed to them), inventory, investments, equipment, and buildings. A typical organization’s liabilities include accounts payable (what they owe in the short-term), loans, and other accrued items such as salaries earned by employees but not yet paid in cash.
Equity on a company balance sheet consists of shares of stock (representing ownership), retained earnings, and a number of miscellaneous items placed in equity due to accounting rules. Retained earnings are the earnings/profits (and losses) that have accumulated since the organization started. When a company has a profit, the retained earnings increase by the profit. When a company has a loss, the retained earnings decrease by the loss.
Like its name implies, a balance sheet is balanced. That is, the assets equal the liabilities plus equities. Balance sheets always balance. Balance sheets present the financial position for a specific day, usually the end of a period (month, quarter, and year). For example, a balance sheet may be presented for December 31, 2004 or for April 30, 2003. A balance sheet is a snapshot (a point in time) of the financial position, much like a cash balance in a bank statement at the end of a month.
The Income Statement
Second, the income statement (e.g., the statement of operations) presents financial performance for a period of time. This means it shows what sales and expenses were for a week, a month, a quarter, or a year and if the organization made a profit during that period of time. This is like the activity in and out of a bank statement during a period.
Statement of Cash Flows
The final primary financial statement is the statement of cash flows. Like the income statement, the statement of cash flows is prepared for a period of time. It identifies where the company generated cash and where it used cash during the same period of time as represented in the income statement. The statement of cash flows is derived from the income statement and the related balance sheet. In addition to showing the inflows and outflows of cash, it reconciles accounting profit to cash profits.
Financial statements present a quick comprehensive understanding of an organization’s financial health and performance. In addition to the primary financial statements, users must review the notes of the financial statements. The notes provide additional detail on how accounts were computed and identify other issues not necessarily reported in the primary financial statements.
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