hpa 211 lesson 7.docx

# hpa 211 lesson 7.docx - Hpa 211 lesson 7 Financial...

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Hpa 211 lesson 7 Financial Operating Ratios – How am I doing? The financial statements represent a rich treasure trove of analytical information. The utility of that information depends on the accuracy of recording business transactions in the proper accounts. Financial statement analysis is useful in finding answers to important questions about the operating performance of the organization. This week we’ll focus on key categories of financial ratios. Liquidity: Can I pay my bills on time? Does the organization have sufficient cash or the capacity to convert assets to cash to pay bills and purchase supplies, services, or assets? Profitability: Am I earning enough profit? How well does the organization use its assets to earn income? Solvency: Will the organization be there tomorrow? How much risk does debt pose to survivability? Financial Ratio is another name for financial indicator. The ratios provide a numeric measure to monitor organizational financial performance and alert management to consider corrective action. Financial ratios combine multiple accounts from the financial statements into a single summary indicator of performance. For example, the most common liquidity ratio, the current asset ratio, combines information from the current asset and current liability accounts to provide an answer to the question, “can the organization pay its bills on time?” There are literally several thousand financial ratios. We’ll focus on the most common ratios that are used to answer the key questions. Liquidity You get a bill in the mail and your first question is, “can I pay  this?” When you ask that question, you’re asking about your  personal liquidity. Healthcare organizations ask the same

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question. Liquidity is the healthcare organization’s capacity to pay current bill with cash on hand or current assets that can be quickly converted to cash. The Current Ratio is the most commonly used measure of  liquidity. It is an estimate of how much cash may be available in  actual cash or by selling current assets for cash. The formula for calculating the Current Ratio requires Current  Assets/Current Liabilities, which are found on the Balance Sheet. The numerator (Current Assets) of the Current Ratio represents  the most generous estimate of cash for the coming year. The  denominator (Current Liabilities) represents the estimated bills  that will come due in the next year. The ratio will tell us that for every \$1 in bills that come due in the  denominator, how much cash may be available in the numerator  to pay that \$1. For example, a ratio of 2.00 means that for every  \$1 in bills, there are \$2 available in cash for payment.
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