Understanding Financial Statements for a Health Care Organization - Essay Example

"Understanding Financial Statements for a Health Care Organization" is an engrossing example of a paper on the health system. Accounting involves the collection, organization, summary, and communication of financial information of an organization with the aim of informing decisions among different stakeholders. Many activities are involved in the accounting cycle and culminate in the preparation of financial statements that may further be analyzed through ratios. This paper discusses insights on financial statements, with a focus on health care organizations. 

Significant insights related to the purpose and components of the balance sheet and the income statement

The key insight relating to the purpose and component of the balance sheet and the income statement is the rich information that the statements have and that requires expertise in order to interpret and present meaningful information to each category of stakeholder to an organization. The balance sheet, for example, may appear simple with little information, often summarized in a single page, but its information serves different stakeholders and may require accounting and statistical knowledge to analyze in a cross-sectional or longitudinal scope. An organization’s credit suppliers and short-term investors may be interested in the organization’s current assets and current liabilities and analysis of current ratio and liquid test ratio could facilitate this. Lenders of long-term loans to an organization are however interested in equity, fixed assets, and an organization’s existing total liabilities. Diversity in purpose is also evident in the income statement in which an organization’s management is interested in revenues and gross profit for evaluating efficiency in operations management while only net profit serves the interest of tax authorities. The amount of dividend offered per share and dividend per share ratio is however important to stockholders and potential stockholders to evaluating returns on investment in an organization. Consequently, I learned that the two financial statements offer comprehensive information on an organization’s financial position and performance and therefore serve multiple purposes to different stakeholders (Drake and Fabozzi, 2012). 

Challenges that managers may encounter in interpreting financial statements

The ambiguity of accounting terms and dynamism are the key challenges that managers may encounter in interpreting financial. Applied terms in accounting may have different definitions from the general meanings outside the accounting field and a manager may apply a general meaning in an interpretation. Such an interpretation will, therefore, be wrong. Accounting concepts also vary across countries, especially those countries that have not incorporated international standards or those that offer options for the application of local accounting concepts. This is significant to managers of the multinational organization as they may fail to understand the diversified concepts. Accounting concepts also keep changing and this means that managers need to update their knowledge of accounting concepts. Lack of updated knowledge is the cause of the challenges and periodic seminars for managers, in which they are trained on emerging concepts, is a solution (Banerjee, 2010; Epstein and Jermakowicz, 2008).

Key information found in the financial statements for a health care organization and reason for its importance

Operating cost is one of the key information in the financial statement of a healthcare organization. The organization offers critical services to human life and its sustainability, both short term, and long term are important. This identifies the significance of operations costs that should be managed to ensure sustainable operations and at the same time ensure quality services. Effective management of operational cost may also transfer benefits to other elements such as availability of cash and cash equivalents and expansion of assets through retained revenues (United Health Group, 2013).

Read More