Financial statements are business reports that are prepared on a periodic basis to show the financial performance and position of an organization. Financial reporting is done annually, semi-annually or on quarterly basis. There are four main financial statements that are prepared by all organizations in accordance to the generally accepted accounting principles. The four reports include a balance sheet, an income statement, a statement of cash flows and a statement of owners equity. A balance sheet shows an organization’s liabilities, assets and shareholders’ equity. An income statement summarizes an organization’s financial activities i.e. revenues and expenses over a given span of time (The Basics of Accounting, n.d.). A cash flow statement summarizes the cash that was received and used by a particular company over a specified period of time; it either shows a cash surplus or a cash deficiency.
Financial Statements: Contents and relationships
Total assets in a balance sheet should always be equal to the summation of liabilities and shareholders’ equity i.e. assets = Liabilities + Equity. Assets that are easily convertible into cash are called current assets and they include cash and cash equivalents, net inventories, accounts receivables, prepaid assets and marketable securities. Current assets are held for a short period of time; they are usually used in financial operations. Fixed assets are acquired for long term use and are not meant for resale. Common fixed assets consist of land, equipment, buildings and Patents. Fixed assets are recorded in the balance sheet at their historical costs. Liabilities represent what an organization owes to others; they can be long-term or short- term. Liabilities can be categorized into share capital, loans and reserves or surplus. Current liabilities include accounts payable, bonds payable, accrue wages and mortgages payable. Long term debts take more than one year to be paid; they can be loans or mortgages. Loans can either be secured or non-secured. Equity share capital and preference share capital form the owners’ equity. Reserves and surplus are the net profits that were accumulated over a given time.
Income statement is governed by this equation: net income = revenue – expenses. Revenue comes from the net sales made by an organization. For healthcare organizations, revenue is obtained from the services and product sales. Other components of an income statement include the operating expenses, cost of goods sold, gross profit, net profit before tax, net profit after tax and retained earnings. Interest can be either revenue or an expense (interest income or interest expense). Pharmaceuticals are the main products that are sold in healthcare corporations. There are many operating expenses such as wages, salaries, rent, rates, leases, bad debts, depreciations, purchased medical services and amortization among others.
Gross profit is the difference between the net sales and the costs of goods/services sold over a certain period. The total operating expenses are deducted from the gross profit to obtain the net profit. Other items found in an income statement include net income per share and the outstanding average shares. Net income per share is obtained by dividing the net profit after tax by the number of shares held (Chindex International annual Report, 2011).
A cash flow statement shows a company’s ability to pay its bills. In healthcare organizations, a cash flow statement is comprised of cash inflows and outflows from operating, financing and investing activities. Cash inflow from operating activities include receipts from the sale of goods and rendering of services, cash received from commissions, fees and royalties. Cash outflows from operating activities include cash payments to suppliers of goods and services, cash payments to employees, payments of insurance premiums and annuities among others. Cash flows from investing activities consist of receipts and payments made with respect to the acquisition of assets, disposal of assets, purchase or sale of shares, cash loans made to other parties and forward contract payments. Financing activities arise from shareholders funding like cash repayments of amounts borrowed, cash proceeds from the issuance of shares, debentures, bonds, loans, notes and others kinds of current or long term borrowings. The opening cash and cash equivalents are adjusted with receipts and payments made during the year to arrive at the net change in cash and cash equivalents (Thomas R. 2010).
Financial statements are different and similar in various ways. All financial reports are developed from accounting entries that are made in the general ledger and the accounting journal. All the financial reports are based on accounting equations. Financial statements are professionally prepared to balance according to the respective accounting equations (Rosemary, n.d.). Generally accepted accounting principles guide accountants in the preparation of the end year reports. All the statements are interconnected; for instance, an expense paid is reflected in both the cash flow statement and the income statement. An expense decreases an asset recorded in the balance sheet. Financial reports have different formats and entries. Moreover, each account serves a different purpose; a balance sheet shows the financial position of a company while a cash flow statement shows an organizations’ liquidity level.
Financial Management issues in health care organizations
There are many issues in health financial management i.e. financial burdens faced in the health sector. Some of the challenges faced in the health sector include cash flow crunch, shortage of medical record coders, high security risks and challenges brought about by Recovery Audit Contractors. Most healthcare units have a ‘pay as they go’ rule. For that reason, cash flow can either be delayed or eliminated; this can lead to high losses. Government gets revenue from healthcare organizations in the form of taxes. Recovery audit contractors (RAC) cross check healthcare records using a sample survey method. The contactors get a contingency fee for every fraud that they uncover. The auditors find out how an error applies and they multiply it by all the healthcare accounts. RACs tend to provide unrealistic fraud figures in order to get a significant contingency fee. There are very few competent medical coders especially in the remote areas. Outsourcing healthcare records is highly risky since contactors can mess up with medical records.
Health care organizations are required to prepare financial statements on annual basis. Medical firms have different financial years e.g. some financial years end in December while others end in July. Health care accounts must be audited to ascertain their credibility by an independent body. Health care revenues are gradually changing due to the introduction of medical insurance covers and other treatment plans. Financial reports from most health facilities show a steady increase in profits. This is because people can afford the basic and special treatments through their medical covers. Health organizations have different operations from companies that deal in the production and sale of products. However, medical financial statements are prepared using the Generally Accepted Accounting Principles to show an organization’s financial performance.