Purposes and Components of the Balance Sheet - Essay Example

The sole purpose of preparing financial records by different organizations which embrace balance sheets and income statements is to communicate different financial information to the key stakeholders of an organization. These financial statements help the organizations to gain a better understanding of their business position in terms of monetary flexibility. Hence, organizations prepare balance sheets for the purpose of evaluating their financial position (Zions Bank, n.d.).

The basic constituents of the balance sheet are identified as the net worth of assets, equity of the owners or the stockholders, and the liabilities held by the organization for a particular fiscal year. In this similar context, the assets which are taken into concern in the balance sheet of an organization include cash, stock or inventory, bills receivable, tangible properties (e.g. plant, machinery and buildings), and goodwill. In this context, goodwill is viewed to be a kind of intangible asset and appears on the assets side of the balance sheet. Arguments concerning the calculation of goodwill and its inclusion in the asset side of a balance sheet have consequently given rise to certain questions which also require to be considered by managers dealing with company finances (Zions Bank, n.d.).

The key components of the income statement of an organization include revenue, operating expenses (both direct as well as indirect), depreciation, operating profit, net income, earnings per share, gross, and its corresponding net profit. In this regard, only the indirect expenses appear in the income statement as the expenditures are indirectly related to the making of goods which again gives rise to certain questions concerning the reasons to avoid including direct expenses.  The income statement usually delivers an exact picture of the incomes as well as the expenses incurred by the business and also determine their profitability along with business performance (Wall Street Prep, n.d.).

Challenges in Interpreting Financial Statements

Managers entitled to perform the financial recording of an organization are often examined to face daunting problems or challenges while interpreting the financial statements in order to make efficient financial decisions. The reasons fundamentally include extremely competitive business conditions, composite business transactions, the requirement to comply with composite accounting rules and regulations, inefficient reporting from subordinates, and huge compliance expenditures. In this regard, one of the most apparent challenges which are frequently faced by the managers in interpreting financial statements is the obligation to follow specified auditor norms which if misrepresented can even necessitate financial restatements. Consequently, the reporting failures as a form of financial restatements pose a considerable impact upon the organizations by affecting their financial position to a large extent (DeZoort, n.d.). The other challenge which might be faced by the managers while preparing financial records indicates towards the accurate determination of revenue or capital expenditures. This challenge can lead towards affecting the income statement of the organizations to a large degree. However, this challenge can be addressed by taking into concern the actual items of the revenues along with the expenditures in the income statement for the motive of evaluating profitability as well as flexibility (Wall Street Prep, n.d.).

Overview of the Financial Statements of a Healthcare Organization

The constituents of financial statements vary according to the business operations from one sector to another. The financial statement of UnitedHealth also reveals unique and immensely valuable information relating to the US healthcare sector. One of the imperative pieces of information which have been viewed in the 2011 financial statement of this organization is regarding the total revenue. As can be revealed from the information presented in the financial statement, it has been identified that the total revenue or the earnings of the organization increased substantially in the year 2011 amounting to US$ 101, 862 million in comparison to the amount generated in the year 2010 which stood at US$94, 155 million implying a change of 8%. This information can be identified as quite important for the organization as it tends to support the organization in determining its profitability with accuracy. Moreover, in relation to the financial statement as a form of the balance sheet, it has been noted that the total assets of the organization amounted to US$ 67,889 million in the year 2011 which was recorded to be higher than the net worth of the assets owned in the previous year, i.e. of 2010 which amounted to US$63, 063 million. Conversely, the total liability of the organization amounted to $39,597 million in the year 2011 which was also higher than that incurred in the year 2010, i.e. US$ 37,238. This particular information can also be identified as significant for the organization as it can help the company to measure its liquidity position along with flexibility for consecutive years (UnitedHealth Group, 2011).