The Importance of Knowing the Scope of Business Being Reviewed When Using Financial Statements
Financial statements are the essential organizational records that reflect the overall financial business activities, results, and position. The organization can monitor its operations, attract investors and maintain stakeholders based on a strong financial position. Knowing the scope of business being reviewed is important as it helps in identifying the weak areas in the organization that require enhancement or expansion. It also helps in controlling resource allocation in different sectors within the organization. Understanding the scope of the business allows the internal management to plan effectively on how to offset debts or obtain loans when needed. Similarly, investors can decide on the extent of investments depending on the cash flows of the business being reviewed.
Purpose of Financial Statement Components
The balance sheet allows lenders to analyze the current financial situation of the organization by determining whether it has enough cash available or short term assets that are easily convertible to facilitate the monthly repayment of loans at hand according to the repayment plan, or whether the organization has other outstanding loans and amenities in place that can threaten its ability to repay the loan (Cleverley and Cleverley, “Financial Statements”). The statement of operations is used to determine the organization’s revenues and expenses within a specific period of time and helps investors get an overview of the organization’s performance. The statement of changes in net assets is used to analyze how net assets changed over time by determining the total assets acquired and those released. The statement of cash flows helps stakeholders to get a clear view of how cash was generated and used. It determines the cash available to pay creditors.
Major Types of Asset Valuation
The asset valuation is composed of two major types namely; cost valuation and the alternative cost valuation method. The cost valuation method is the primary asset valuation method whereby the value of the asset is based on the actual price of acquisition. The alternative cost valuation method is divided into two; the historical cost and the current valuation methods. Both methods are measured in either nominal dollars or constant dollars. The historical cost, which is commonly referred to as the acquisition cost method, refers to the constant value placed on the asset over time regardless of the changing market values. The current value method revalues the assets according to the reporting time; the assets are quantified based on their current value rather than their acquisition cost (Cleverley and Cleverley, “Accounting for Inflation”).
Uses of Financial Report Information
The financial report information is an important element for organizational decision-making both internally and externally. Lenders, creditors, and investors are always keen on the changes in the financial reporting methods used. When organizations change the financial reporting methodologies, they equally change the financial position of the individual firm and industry, since each method produces a different measure of income (Cleverley and Cleverley, “Accounting for Inflation”). Some changes may weaken the financial position of an organization, while some may strengthen it. Therefore, creditors, lenders, investors, regulatory and rate-setting organizations, as well as community leaders will base their decisions regarding the strength of the current financial position. Similarly, the new financial reporting methods may influence the decisions made by the internal management for instance the adjustment of rate setting.
Cleverley, William & James, Cleverley. Health Care Finance: Financial Statement. 8th ed. Jones and Barlett Learning. 2018. Print.
Cleverley, William & James, Cleverley. Health Care Finance: Accounting for Inflation. 8th ed. Jones and Barlett Learning. 2018. Print