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Team C Learning, Research Paper Example

Pages: 5

Words: 1253

Research Paper

Financial statements reflect how well an organization is performing. A consistent review of financial statements conducted periodically allows an organization to identify financial strengths and weaknesses. In addition, the preparation and review of financial statements meet external reporting obligations and assist with smart financial decisions.

Investors can analyze investment decisions, government agencies can properly assess taxation issues, and the International Accounting Standards Board can monitor proper and ethical accounting practices provided by an organization. Consequently, the failure to review thoroughly financial statements can cause an organization to make bad financial decisions, put the organization at higher risk of fraud, lose stakeholders interest and trust, and ultimately go out of business (Accounting For Management, 2012).

Understanding and analyzing the financial statement along with the language of business is vital to any organization. Learning how to understand and read these major financial statements required in business reporting; understanding how the statements come together or work together; analyzing the financial ratio (MBA Ware, 2007).

Benefits of a thorough review of financial statements would be: Overview, learning most basic among these three main financial statements, which include: Income Statement, Balance Sheet, and Cash Flow Statement. Understanding each one of these statements is crucial in performing a thorough review (MBA Ware, 2007). Lesson Two also includes: Income Statement: Sales; Cost of Sales; Gross Margin; Operating Expenses; Depreciation and Amortization; Operating Income; Other Income and Expenses; Income Before Taxes and Taxes and Net Income, knowing the definitions of each statement (MBA Ware, 2007).

Following Lesson Three: Balance Sheet: Assets; Current Assets; Property, Plant, and Equipment; Intangibles; Liabilities; Current Liabilities; Working Capital; Long-Term Liabilities and Owner’s Equity understanding the shareholders’ equity. Then there is Lesson Four: Cash Flow Statement: Sources and Uses of Cash; Cash Flow from Operating Activities; Cash Flow and Investing Activities; Cash Flow from Financing Activities and Net Cash Flow knowing where the cash is going and how these are used (MBA Ware, 2007).

Lessons Five, Six, and Seven: Require linking these Statements, Analyzing these Statements, and Review, and Final Examination of each financial statement involved. Reviewing the consolidation of financial statements would not be as complicated as one may believe (MBA Ware, 2007). Benefit would be to keep these records in order and to eliminate any mistakes or errors that may occur.

For instance the use of generally accepted accounting practices (GAAP) requires every organization to provide a set of financial statements to alleviate the task of analyzing several statements (Fowler S., 2012).  By following these steps would not only benefit a thorough review but also would exempt any outside auditing that could take place by mistakes made.

There are many red flags associated with the financial statement. Growth potential, competitive advantages and a strong financial health relate to the financial strength of an organization (Magic Diligence, 2009).  The first is “several years of declining revenue.” If an organization has three or more years of declining revenue, it is considered questionable if the organization was a good investment.

Another red flag is a declining gross, operating net, and free cash flow margins. This will indicate that an organization is chasing growth at the expense of profitability (Magic Diligence, 2009). If the organization is not leaving a margin to obtain growth, the organization will not be profitable.

Rising debt-to-equity and or including falling interest coverage ratios is another red flag in statements. This means that the organization is collecting more debt than it can handle.  Another red flag on financial statements is raising accounts receivable and inventories, as a percentage of sales. If the accounts receivables are increasing more than sales this means that the customer is taking too long to pay for products.  If the inventory is rising faster than sales, this means that the organization is producing more items faster than it can be sold.

This red flag can indicate poor supply chain management, poor demand forecasting, and too lenient credit terms for customers. Red flags generally occurred over a longer period of time versus a short-term issue related to uncontrollable market factors (like today) (Magic Diligence, 2009). This is only a few red flags that can be resulted in financial statement.

A thorough review of financial statements is necessary for an organization to get an accurate financial standing of the company. There are consequences when not performing a thorough review of financial statements. The lack of performing reviews of financial statements not only affects the organization but also the people involved with the organization. Not performing a thorough financial review will result in undetected mathematical errors and fraud that could cost the organization and stakeholders.

When an organization fails to detect errors and fraud the result can be bankruptcy. Bankruptcy can involve closing the business and employees losing their jobs. Another consequence of not reviewing financial statements is that it can affect the decision if an organization can get a loan (Finkler, 2006). Some organizations need the loan to obtain new equipment. Suppliers and vendors will also determine if the company can purchase on credit based on the organization’s financial statements. It is important that organizations include vital financial information and a review is completed to ensure there are no mistakes.

There have been many corporate examples of the failure to adhere to expected accounting and business guideline like Enron, Stanford Financial, Arthur Anderson, and countless others. Fraud hurts anyone but in health care those costs are so residual it is disheartening to know of companies that have perpetuated a false state of business. “HealthSouth officers have been charged with accounting fraud and conspiracy to commit wire and securities fraud. The company agreed to pay the government $7.9 million to settle allegations of Medicare fraud,” (Rolland, 2009).

The elderly demographic is putting high strain and severe demand on the resources and providers available. The oversight of HealthSouth to remain true to financial statements have resulted in loss of employment, loss of services, distrust in the public arena, and created added pressures for available providers to deliver care that they no longer can offer.

Conclusion

Financial statements, without a doubt, are vital to a company’s ability to position itself favorably in the business arena. Along with being a GAAP mandated requirement, proper accounting practices and reporting contributes to a company’s reputation in the marketplace as a stable, reputable company that is well respected by those who have a vested interest in the company’s financial conditions such as its consumers, investors, shareholders and employees. A company’s operating results (outlining profits and losses), cash flow (for paying expenses and making purchases) and shareholders’ equity (indicating company net worth) are contained within its financial statements and reported to each vested interest entity accordingly, making them an absolute necessity.

Additionally, financial statements are necessary for business growth and valuation. Processes such as applying for business loans or legitimizing fund raising projects use information contained within a company’s financial statements. Also, financial statements are integral in determining a company’s worth, as may be needed for purposes such as real estate sales or initial public offerings.

Many aspects of the world of business change continually; however, the importance and purpose of financial statements remains the same.

References

Accounting For Management. (2012). Financial statement analysis. Retrieved from             http://www.accounting4management.com/accounting_ratios.htm

Finkler, S. A. & Ward, D. M. (2006) Accounting fundamentals for health care management. Sudbury, MA: Jones and Bartlett.

Fowler, Shaun (2012) How to Analyze a Consolidation of Financial Statement Retrieved from www.ehow.com/how_8616004_analyze-consolidation-financial-statements.html

MagicDiligence.com (2009) 10 red flags in financial statements filing. Retrieved from www.magicdiligence.com/articles/10-red-flags-in-financial-statement-filings

MBA Ware (2012) Financial Competence Retrieved from www.mbaware.com/fincom.html

P.D. Rolland: Whistle Blowing in Healthcare: An Organizational Failure in Ethics and Leadership. The Internet Journal of Law, Healthcare and Ethics. 2009 Volume 6 Number 1. DOI: 10.5580/1822

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