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Introduction
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Financial analysis relies on accurate data
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This information is too complex to be useful
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It is organized into simpler financial statements
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They can be analyzed to judge business performance
Principal Financial Statements
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Statement of operations
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Balance sheet
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Statement of cash flows
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Statement of changes in net assets
Statement of Operations
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Lists the income and expenses
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Only discusses operations related to the processes of the organization
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Used to judge the overall performance of the organization
Useful Statement of Income
Metrics
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Net profit
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Profit margin
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Earnings per share
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Times interest earned
Statement of Operations Issues
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Does not distinguish between cash and other methods of payment
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Potential for misrepresentation
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Fraudulent increase in perceived profitability
Balance Sheet
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Describes the organizations current financial position
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Lists its resources (assets) as well as outstanding claims (liabilities)
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Examples of assets are cash and equipment
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Examples of liabilities are short-term debt and yet unpaid taxes
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The difference between the two is called shareholders equity
Useful Balance Sheet Metrics
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Current ratio
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Quick ratio
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Working capital
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Debt-to-equity ratio
Balance Sheet Issues
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Some assets are challenging to value
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Can be used to conceal theft
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Potential for misrepresentation
Statement of Cash Flows
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Demonstrates the flow of cash in and out of the company
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Only discusses cash, not equivalents
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Reports the current ability of the company to make payments
Useful Statement of Cash Flows
Metrics
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Free cash flow
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Current liability coverage
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Cash flow coverage
Statement of Cash Flows Issues
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Prone to mistakes
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Outstanding account manipulation
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Miscategorization of cash flows
Statement of Changes in Net Assets
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Describes the changes in the net assets of the organization
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Used to clarify items that may not be apparent from the statement of operations
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Often required for not-for-profit healthcare organizations
Useful Statement of Changes in
Net Assets Metrics
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No frequently used ratios
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Net asset change is similar to net profit
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Positive changes are indicative of satisfactory management
Statement of Changes in Net Assets Issues
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Similar issues apply as with the balance sheet
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Organizations may aim to inflate their assets to appear viable
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The purpose of doing so would be to avoid scrutiny and attract donors
Financial Analysis Elements
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Used to formulate future strategy
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Performed by the accounting department in conjunction with top management
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Relies on financial statements
The Six-Step Financial Analysis
Framework
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Industry Analysis
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Firm Strategy Analysis
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Accounting Quality Analysis
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Financials Review
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Forecasting
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Valuation
Industry and Firm Strategy Analyses
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The industry analysis considers competition
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The firm strategy analysis discusses competitive advantages
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They have to be significant and sustainable
Accounting Quality Analysis and Financials Review
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It is vital to consider the potential mistakes and issues in the financial statements
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Once quality is verified, the review can begin
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Ratios and analysis measures can be used to understand specific performance determinants
Forecasting and Valuation
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Project future performance
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Adjust planning based on the results
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Value estimations may not be required for a not-for-profit
Conclusion
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There are four essential financial statements for a not-for-profit healthcare enterprise
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They should be used for financial strategy formulation together
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Their formulation is a step in financial analysis, which is a convoluted process
References
Baginski, S. P., Wahlen, J. M., & Bradshaw, M. (2017). Financial reporting, financial statement analysis and valuation (9th ed.). Boston, MA: Cengage Learning.
Cleverley, W. O., & Cleverley, J. O. (2017). Essentials of healthcare finance (8th ed.). Burlington, MA: Jones & Bartlett Learning.
Klammer, T. (2018). Statement of cash flows: Preparation, presentation, and use. Hoboken, NJ: Wiley.
Reeve, J. M., Duchac, J., & Warren, C. S. (2016). Financial & managerial accounting (14th ed.). Boston, MA: Cengage Learning.
Smith, D. L., Calabrese, D. T. D., & Finkler, S. A. (2018). Financial management for public, health, and not-for-profit organizations (6th ed.). Thousand Oaks, CA: SAGE Publications.
Vona, L. W. (2017). Fraud data analytics methodology: The fraud scenario approach to uncovering fraud in core business systems. Hoboken, NJ: Wiley.
Wahlen, J. M., Jones, J. P., & Pagach, D. (2016). Intermediate accounting: reporting and analysis (2nd ed.). Boston, MA: Cengage Learning.
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