Financial_Statements

Running head: FINANCIAL STATEMENTS Financial Statements Professor Laura L. Forbes, PhD, MHA, MCHES Health Financial Management– HSA 525 January 27, 2013 Financial Statements Healthcare organizations record financial information periodically in the form of financial statements. These statements can illustrate how profitable the organization is or how much it has deteriorated over a period of time. Fortunately, successful financial management plays an important role in many not-for-profit hospital’s efforts to boost profitability, build equity capital, and thus remain financially viable over the long term (Singh & Wheeler, 2012, p. 333). There are only four statements required by the General Accepted Accounting Principle (GAAP), and they are a balance sheet, income statement, statement of owner’s equity, and a statement of cash flows. The purpose for a balance sheet is to show the business’s financial position during any time point, based on how the liabilities and equity add up to the assets. An income statement is known as profit and loss statement, and consists of any income and expense accounts acquired over a specified time period. This is how stakeholders know how well the business is doing after expenses. It illustrates the difference in equity from the beginning and end of a specific period. A statement of shareholders’ equity gives an explanation of changes that may occur in retained earnings, and it is impacted by dividends and income. The final statement is a statement of cash flow summarizes sources and the flow of cash in and out of the business. It reports all changes over time instead of absolute dollar amount during a time point, and helps to determine if the business is capable of paying its bills. Amazingly, each one of the financial statements above is linked in some form. The balance sheet’s assets and liabilities changes are also represented on the income statement under the revenues and expenses, which gives the outcome of a loss or gain for the business. An equity statement will reflect an increase in ending retained earnings from the net income on the income statement. Retained earnings from the end of the equity statement are one of the components of the balance sheet’s stockholders’ equity. Cash flows statements provide a more detailed record regarding the cash assets recorded on the balance sheet. They are linked with each other as well, but not equal to the net income reflected on the income statement. A change in cash on the flow statement added to the beginning balance in cash should equal to the end balance from the balance sheet. In order to get a complete financial overview of a business’s equity all of these statements have to be considered. The Regional Medical Center (RMC) is a non-profit facility located in Orangeburg, South Carolina. RMC is owned and governed by the two local counties of Orangeburg and Calhoun. As an accredited member of the Joint Commission, the hospital continues to provide quality health and compliance with national standards. It “provides a comprehensive health program targeted to industry which includes on-site health assessments, disease prevention education, disease detection screenings, treatment, and follow up” (“Employee Relations,” 2012). RMC’s financial reports dated for February 2012 show that the total cash amount of $12.7 million on the balance sheet and end of year cash on the cash flow statement. Although the revenues increased during the 2011 fiscal, so did the operating expenses by 1.3%, even though it resulted in profit (“Audited Financial Statements,” 2012, p. 6). The income statement shows an ending net income of $832,161, which is a significant increase from the loss experienced in the previous year. This amount is expressed in more detailed under the reconciliation of operating income (loss) to net cash provided (used) by operating activities on the statement of cash flows. Net income is shown on the beginning of the statement of cash flows to show how it flows in and out of the hospital to calculate the current amount of cash on hand. The cash on hand is the amount initially started with on the balance sheet to help determine the stakeholder’s equity of $122.2 million at the year’s end. These three statements begins with the reflection of activities that the hospital engages in to obtain revenues, and then establishes a bridge showing how they drive better value for stakeholder’s equity. Today, the financial environment is becoming more hostile for health care providers, and the finance function should not be ignored if they want to avoid a financial disaster. Financial management is defined as a decision type of science that allows management the rational means necessary to make more accurate conclusions. According Codija (2013), “health care financial management also serves as a key barometer for corporate performance because it helps senior management allocate corporate funds, analyze and forecast corporate financial condition, monitor personnel productivity and prepare accurate accounting reports.” Unfortunately, there will always be health care finance issues, and it is always best to prepare for them in advance. There are several issues that are a cause for concern, but the top three are as follows (Gapenski, 2012, p.8): 1. Develop a long-term business plan for physician integration. 2. Implement substantial and sustainable cost-containment strategies. 3. Amend strategic and capital plans to account for potential shifts in revenue. Financial information not only helps medical professionals to plan and manage, but also to make decisions that is effective and specific to their business. It is really important for financial managers to be able to interpret and understand the economic health of the business using financial statements. Singh and Wheeler (2012) states that “hospitals will need to adopt financial systems that can accommodate higher patient volumes, facilitate coverage eligibility verification, and provide enhanced patient access to financial information” (p.337). Application of accounting methods that permit assessment of the impact of various new scenarios allows for better control of the outcome. It is crucial for business organization to understand financial statements, because they are essential to their success. “They can be used as a roadmap to steer you in the right direction and help you avoid costly breakdowns” (“Preparing Financial Statements,” n.d.). One financial statement alone will not portray the whole picture, because they are all linked together in the ways expressed in this essay. So, when combined, they provide very powerful information for stakeholders, and having this knowledge can be the best resource they can use in order to invest wisely. Reference Audited financial statements (2012). Regional Medical Center. Retrieved from http://www. trmchealth.org/rmc.nsf/Files/2010-2011%20Financial%20Statements/$file/2010%20- %202011%20Financial%20Statements.pdf Codija, M. (2013). Understanding health care and financial management. EHow. Retrieved from http://www.ehow.com/about_7284040_understanding-health-care-financial- management.html Employee relations. (2013). Regional Medical Center. Retrieved from http://www.trmchealth. org/rmc.nsf/View/EmployerRelations Gapenski, L. (2012.) Healthcare finance: An introduction to accounting and financial management (5th ed.). Chicago: AUPHA Press / Health Administration Press. Preparing financial statements. (n.d.). Small Business is America. Retrieved from http://www.sba.gov/content/financial-statements Rauscher Singh, S., & Wheeler, J. (2012). Hospital financial management: What is the link between revenue cycle management, profitability, and not-for-profit hospitals' ability to grow equity' Journal of Healthcare Management, 57(5), 325-339. Retrieved from Business Source Complete, EBSCOhost.