Analyzing Financial Statements

Analyzing Financial Statements

Analyzing Financial Statements

A standard set of financial statements includes the balance sheet, income statement, statement of cash flows, and associated footnotes. These statements can be issued on a daily, monthly, quarterly, or annual basis. Additional statements may include, for example, the analysis of stockholders equity section. If accounting is the basic language of business, then financial statements are the fundamental scorecards that report organizational performance (Cleverley, 2002).

Although financial statements are produced under the authoritative guidelines of generally accepted accounting procedures (GAAPs), health care professionals should understand some fundamental concepts and assumptions about financial statements. First, almost all the numbers in financial statements are based on managerial estimates. Yes, that is right. Probably the only really firm number on the financial statements is cash. It is like a group of people looking at Sears Tower, asking, How tall is this building? How many different guesses would you receive? On average the group would probably be pretty close but not exact. To become more precise, the group would have to exert more time and energy. The same is true of financial statements. There is always a tradeoff between more accurate information and the cost to produce such information (Cleverley, 2002).

Another assumption is that GAAP financial statements are based on materiality thresholds. If you examine an audit opinion, you will see that the auditors usually say something like the following: “In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of company and subsidiaries at December 31, 2008, and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with generally accepted accounting principles.” So are numbers included in financial statements 100% accurate? ...