Accounting Practices Essay

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Methods of Analysis
Courtney J. Anthony-Brown
ACC 281 Accounting Concepts for Health Care Professionals
Edward Kaplan
August 24, 2014

Financial statements are used as a benefit to an investor and a creditor. These statements help both make informed decisions about lending money and buying stock (Epstein & Schneider, 2014). Financial statements can also benefit management in a health care organization by discovering trends and finding things that may need to be changed to improve the overall financial health of the organization (Epstein & Schneider, 2014). Those who use financial statements tend to analyze them in order to make choices such as investment equity and loans. Management and executives can use analysis to identify problems and make proper changes to pricing, purchasing, and staffing to improve an organization’s profitability and liquidity (Epstein & Schneider, 2014). In this paper I will evaluate three methods of analyzing; horizontal, vertical, and ratio. In addition I will discuss how each method is used financially to make particular decisions. Last I will provide a scenario in health care for all three methods of analysis, in which they would be used. A vertical analysis occurs when each expense category on an income statement is shown as a percentage of sales (Epstein & Schneider, 2014). The most common use of a vertical analysis is to show various expense items as a percentage of sales on an income statement or a percentage of different revenue items of a total sale (Financial Statement Analysis, 2014). A vertical analysis can help show a spike in expenses and show the smallest of expenses that may not need much reviewing (Financial Statement Analysis, 2014). When a vertical analysis is being done on a balance sheet, one of the main issues is knowing what to use as a denominator in the percentage calculations (Financial Statement Analysis, 2014). The total of assets or liabilities can both be used as a denominator when calculating all liability line item percentages and all equity line item percentages (Financial Statement Analysis, 2014). A vertical analysis can be useful by noting changes in an organization’s investment in working capital and fixed assets (Financial Statement Analysis, 2014). A vertical analysis can be used to compare financial statements that are during the same time period (Epstein & Schneider, 2014). In the health care field, a vertical analysis can help compare two health care organizations and weight in on areas that may need improvements. For example, a hospital can review their balance sheets for the year of 2011 and 2012 and compare salaries and wages of the health care organization and see what percentage of the profits it makes up and from here can determine any changes that may need to be made.
A horizontal analysis can be used to compare financial statements for more than two time periods (Epstein & Schneider, 2014). This can be used to show the changes in specific accounts from two different time periods (Epstein & Schneider, 2014). This method of analysis can be used to look for trends in an organization’s income (Financial Statement Analysis, 2014). Horizontal analysis can help shed light on changes that may need to be looked into. By using this method, health care organizations can look at individual financial statement items over many accounting periods (Epstein & Schneider, 2014). These periods can range from different quarters within a year or go back through several years (Epstein & Schneider, 2014). This method can be used track a specific dollar amount or by calculating percentages (Financial Statement Analysis, 2014). For example a hospital may notice their revenue increased from one specific time to another by a specific dollar amount of $42 million or 15%. This helped this
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