Fundamentals of healthcare finance

Financial Statement Analysis and Operational Analysis in Healthcare

Financial statement analysis is the process of evaluating a company’s accounting records in order to determine past, present, and prospective performance (Gapenski, 2012). The income statement, statement of changes in equity, balance sheet or statement of financial position, and statement of cash flows are the four key accounting reports studied during a financial examination.

Operational analysis, on the other hand, is assessing a company’s operational processes to see if they are efficient. During operational analysis, factors of an enterprise such as production procedures, material costs, equipment deployment, and workplace conditions are reviewed. Both financial statement analysis and operational analysis are essential to healthcare managers and investors. The healthcare managers use the past financial and operational reports to predict how the facility will perform in the future. These documents also hint to areas of the healthcare facility that require improvement based on the present performance.

Investors, who have shares in a particular health institution, utilize the financial statement and operational analysis to assess how the firm is performing. They use these reports to determine the most profitable areas in the health facility, which they can invest in.

13.2

No, financial statement analyses are based on both the historical, current and projected financial data. Evaluating the past accounting records gives an insight on how the company will perform in future.

13.5 a

As a result of inflation, the earnings usually increase over time, even when there is no significant increase in the sales volume (Gapenski, 2012). What happens is that the book value of assets, which records the sales and annual depreciation expense, remains constant, failing to reflect the actual cost of replacing assets. Due to this constancy, the ratios that evaluate current flows against historical data become distorted with time.

When comparing different companies, the return on asset ratio differs with the age of the assets. For instance, a company whose assets were purchased at an early date records lower asset values than a company whose assets were purchased later at an inflated pricing.

13.5 b

Inflation affects nearly all accounting records, that is, both the balance sheet and the income statement. An increase in prices causes a rise in the valuation of tangible assets recorded on the balance sheet (Gapenski, 2012). Similarly, businesses earn higher profits in an inflationary period, and, thus charged higher taxes. These adjustments in the profits and losses are recorded in the income statement.

Reference

Gapenski, L. C. (2012). Fundamentals of healthcare finance, 2nd ed. Chicago, IL: Health Administration Press. ISBN: 978-1567934755