Financial Statement Analysis: Seven Crucial Components | Free Essay Example

Financial Statement Analysis: Seven Crucial Components

Words: 935
Topic: Business & Economics
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Introduction

Financial stability of any company helps in creating good reputation that could be considered by banks for future loans. The management team should focus on strengths since this is the core that determines the status of each section of the company. Calculations on financial ratios are basically derived from information obtained from the accounting records.

The ratios provide the required guidelines of measuring the progress of the business and at the same time alert the management on the problems that might occur within the Hospital. The profitability ratios indicate the level of efficiency on how capital is being utilized.

Liquidity ratios on the other hand help in indicating the ability of the hospital to continue with its normal operations even in the midst of unexpected problems. Growth ratios are best used in the process of tracking down the financial progress within the hospital (HospitalBenchmarks.com).

Financial statement analysis for Centiere Hospital

There are indeed seven components of financial statements that are very crucial for the running of any business entity some of which are discussed below. They include the following;

Assets

These are described as the entities that a business owns and are always used to describe the future financial benefits of an organization. Assets are normally controlled from the business premises and usually obtained as a result of previous analyzed business transactions. Assets usually possess some crucial characteristics which can either place the organization in jeopardy or success.

These characteristics include; placing the organization in a position where it could benefit from any predicted economic stabilities within any market irrespective of the location. Then the assets are essentially controlled by the organization’s management. And finally it comes as a result of analyzing previous financial transactions. One of the weaknesses of Centiere Hospital is the bed capacity it offers, this seems to be smaller compared to the number of in-patients it should serve within a given period.

This therefore provides an opportunity to increase the hospital’s assets. Assets would be used for the calculations of current ratio which of which on ideal situation will be expected to be twice the current liabilities. It will help in revealing the satisfied level of the Hospital’s financial performance (Pink et al 87-96).

Liabilities

These present the negative economic benefits that an organization could suffer from. These aspects of an organization come-up as a result of financial obligations that the organization should fulfill using its current finances. The liabilities could further be expressed as means of providing services to other entities as per future predictions.

There are several characteristics of liabilities some of which include; used as the only future sacrifices to be made for stability of future financial position. They share one of the crucial characteristics with assets since they are obtained from the results of future transactions. The liabilities are also used in the analysis of the current ratio and liquidity ratios; it would help in revealing the level by which the Hospital could settle its debts (Pink et al 87-96).

Current Ratio = Current Assets/ current liabilities

Liquidity Ratio = Liquid Assets/current liabilities

Equity

This presents the remaining part interests obtained from assets, especially after the analysis of financial statements removes all liabilities. It is an essential part of an organization since it is one of the ways that help in revealing the financial stability of the business. It is presented as; Equity = assets – liabilities. Debt to Equity ratio for the Hospital would indicate the soundness of the financial position of the Company in the long-run. High debt to equity ratio is a representation of unstable financial position (Pink et al 87-96). It is calculated as follows;

Debt to Equity ratio = Loan/Equity

Revenues

This presents the inflow of finances as a result of acquiring assets and at the same time settling all the financial woes of the organization. They normally arise as a result of producing good and providing efficient services for the benefit of the organization. Characteristics of revenues are derived from the process of obtaining assets and settling of financial woes within the organization. This could also be derived in the processes of administering excellent services. Some calculations could well be utilized (Pink et al 87-96).

Gross profit margin (%) = (gross income/ sales) ×100%

Expenses

These are financial outflows that arise as a result of using assets. They form an essential part in maintaining the inflow as well as production of the same goods. Expenses can as well be derived from the kind of services rendered to or by the organization. The main characteristics of expenses are outflow of total assets and delivery of goods and services (Pink et al 87-96).

Benefits

This presents the privileges gained as a result of the increases realized from analyzing the organization’s transactions on equity. Gains or benefits have some essential characteristics which include improvements realized from the analyzed transactions; it excludes all the benefits realized from personal investments (Younis and Rice 65-73).

Losses

This presents the kind of decreases realized from analyzing transactions on final assets. One of its characteristic is that it represents drastic decline in the present organization’s equity owing to analysis of transactions (Younis and Rice 65-73).

Net- Income

This represents the amount of finances left within the organization after removing expenses, losses and gains from the total revenue of the company. It is essentially characterized by high revenues as a result of less overall financial subtractions (Younis and Rice 65-73). The calculations that would be necessary for the analysis include;

Net Income= financial revenues – (financial gains + Expenses – financial losses)

Net profit margin = (Net income/sales) ×100%

Works Cited

HospitalBenchmarks.com. 2006 Amanac of Hospital Financial and Operating Indicators. Salt Lake City, 2006. Web.

Pink, George, Daniel Imtiaz, McGillis, Linda & Ian, Mckillop. Selection of Key Financial Indicators: A literature, Panel and Survey Approach. Healthcare Quarterly Journal, 10 (2007):87-96

Younis, Butt & Barbara, Rice. An empirical investigation of hospital profitability in the Post- PPS era. Journal of Health Care Finance, 28 (2001):65-73.