Assignment: American Accountants Institute

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Assignment: American Accountants Institute

Assignment: American Accountants Institute

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At the organizational level, establishing the facts (the first step) usually relates to a review of the organization’s key financial statements, including the balance sheet, statement of operations, statement of changes in net assets, and statement of cash flows. As recom- mended by the American Institute of Certified Public Accountants (AICPA), healthcare organizations with permanent controlling financial interests in other healthcare organiza- tions should prepare consolidated financial statements to properly report the relationship (AICPA 2012). Before they undertake financial analysis, investors and creditors may require that independent auditors review the financial statements to confirm their accuracy.

The second step, comparing the facts about the organization over time and with facts about other, similar organizations, includes ratio analysis, horizontal analysis, and verti- cal analysis. Ratio analysis, which was introduced in chapter 1, evaluates an organization’s performance by computing the relationships of important line items found in the financial statements. There are four kinds of ratios: liquidity, profitability, activity, and capital structure.

Horizontal analysis evaluates the trend in the line items by focusing on the percent- age change over time. Vertical analysis evaluates the internal structure of the organization by focusing on a base number and showing percentages of important line items in relation to the base number. When ratio analysis, horizontal analysis, and vertical analysis have been completed, the organization can compare present ratios, trends, and percentages to its past ratios, trends, and percentages. The organization can also develop industry comparisons

horizontal analysis

that compare the organization’s present ratios, trends, and percentages to those of other, similar organizations.1

The third step of financial analysis, using perspective and judgment to make deci- sions, takes into account the information obtained in the first two steps, in addition to information derived from the decision maker’s unique perspective and judgment, to make the decision.

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