It is imperative that any business entity systematically develops and analyses the information about its financial affairs. This process is referred to as accounting. Accounting information can be used in different ways. It can be used in the strategic decision making, plan future operations as well as evaluate the entity’s performance. Financial statements are the most basic financial tools, which investors rely on when evaluating an entity’s financial status. This essay will highlight the relationship between the balance sheet, the income statement and the statement of cash flows with respect to New Hanover Regional Medical center Wilmington, North Carolina (NHRMC) for the years ended September 30, 2011 and 2010. NHRMC is a component unit of New Hanover County, North Carolina (New Hanover Regional Medical Center, 2011).
The Relationship between Income Statement, Balance Sheet and Statement of Cash Flow in Health Financial Management
Financial statements provide relevant financial information for internal and external users. They show the profitability of an entity (Stahl, 2004). That is, it reflects a business capacity to generate profit. Each financial statement has a specific function.
The balance sheet indicates an entity’s profitability. It is also known as the statement of financial position (Taylor & Pinczuk, 2004). It provides information about assets, stockholders’ equity and liabilities of a business enterprise at a specific time. Therefore, it helps in predicting the timing, amounts and uncertainty of future cash flows.
An income statement is an accounting document that lists an entity’s expenses and revenues for a specified period (Penner, Philadelphia, Penns.). It also presents the net profit or loss in capital subject to the expenses and revenues. The difference between revenues and expenses, plus other gains minus losses gives either the net profit or loss (Revenues – Expenses = Net income) (HcPro, 2011).
A cash flow statement provides information on financial activities, investing activities and operating activities of an entity. The income statement, the balance sheet and the statement of cash flow are accounting documents that may be used by any entity. The official formats of these documents must be routinely filed with the necessary departments (Taylor & Pinczuk, 2004). The information generated from the income statement is used to make statements of cash flow and balance sheets. Unlike the income statement, the balance sheet provides accounting details for a specific point in time.
One of the basic components of these documents is the underlying accounting equation, which is liabilities plus assets equal stakeholders’ equity (Penner, Philadelphia, Penns.). The balance sheet depicts the total amount of liabilities, assets and stakeholders value for a particular time. The balance sheet provides a list of cash assets, which is used to make statements of cash flows. The amount of net gain listed on the income statement is also presented in the statement of cash flow under the operating activities section.
Investors, organizational leaders and the government use these financial statements to establish a company’s overall financial health and its operations. The cash flow statement provides essential information on the administration’s implementation of the available financial resources (Stahl, 2004). It also helps in the evaluation of an originations’ liquidity and its ability to pay its expenses. Financial ratios and various calculations may be computed using the numbers in these accounting documents. These include an organization s operating margin and its debt-to-equity ratio.
Financial statements are the primary tools used for reflecting the financial health of an entity. Business owners and investors should have an overview of the financial statements to be able test their capacity to generate profit. Having an understanding of the financial statements and their relationships helps the stakeholders to understand an entity’s financial position and strategically make decisions related to it.
HcPro. (2011, December 29). Your Hospital’s Financial Statements: How Management Keeps Score. Retrieved April 16, 2013, from HcPro: http://www.hcpro.com/MSL-274664-871/Your-Hospitals-Financial-Statements-How-Management-Keeps-Score.html
New Hanover Regional Medical Center. (2011). Annual Financial Report. Retrieved April 16, 2013, from NHRMC: http://www.nhrmc.org/workfiles/Final-NHRMC-rpt_FY2011.pdf
Penner, S. J. (Philadelphia, Penns.). Introduction to health care economics & financial management : fundamental concepts with practical applications. 2004: Lippincott Williams & Wilkins.
Stahl, M. J. (2004). Encyclopedia of Health Care Management. Thousand Oaks, CA: SAGE Publications.
Taylor, J. D., & Pinczuk, J. (2004). Health care financial management for nurse managers : merging the heart with the dollar. Sudbury: Jones and Bartlett Publishers.