Our orders are delivered strictly on time without delay
Our orders are delivered strictly on time without delay
Discuss the components of the three key financial statements and the relationship among them.
Compare and contrast operational budgets and capital budgets. What type of items would an HIM manager include in each?
Calculating and explaining budget variances is an important management control. Following up and taking action on budget variances is also critical. How would you categorize these activities based on the three types of internal controls: preventive, corrective and detective?
The three key financial statements are the Income Statement, the Balance Sheet, and the Statement of Cash Flows.1 They provide different, yet related, perspectives on an organization's financial health over a specific period.2
| Financial Statement | Primary Purpose | Key Components |
|---|---|---|
| 1. Income Statement | Reports a company's financial performance over a specific period of time (e.g., quarter, year). It shows profitability. | Revenues (money earned from services/sales), Cost of Goods Sold (COGS, if applicable), Operating Expenses (salaries, rent, utilities), Interest/Taxes, and ultimately, Net Income (Profit). |
| 2. Balance Sheet | Reports a company's financial position at a specific point in time. It adheres to the accounting equation: Assets = Liabilities + Equity. | Assets (what the company owns: cash, receivables, property, equipment); Liabilities (what the company owes: payables, debt); and Equity (the residual claim of the owners). |
| 3. Statement of Cash Flows | Reports the movement of cash (inflows and outflows) over a specific period of time. It explains the change in the cash balance shown on the Balance Sheet. | Divided into three sections: Operating Activities (cash from normal business), Investing Activities (cash used to buy/sell assets like equipment), and Financing Activities (cash from/to owners and creditors). |
The three statements are intricately linked, as changes in one impact the others:3
Income Statement to Balance Sheet: The Net Income calculated on the Income Statement flows directly into the Equity section of the Balance Sheet (specifically, as an increase in Retained Earnings).4
Statement of Cash Flows to Balance Sheet: The ending cash balance calculated on the Statement of Cash Flows must exactly equal the Cash line item listed as a current Asset on the Balance Sheet.5
Cross-Impact: Non-cash transactions on the Income Statement (like Depreciation Expense) affect the Balance Sheet (reducing the value of Assets) and are accounted for on the Statement of Cash Flows (as adjustments in the Operating Activities section).
Budgets serve as management control tools, but they differ significantly based on the time frame and the nature of the expenditure.6
| Feature | Operational Budget (Expense Budget) | Capital Budget |
|---|---|---|
| Purpose | Planning for the day-to-day running costs and revenue generation for the upcoming fiscal year. | Planning for the purchase or sale of major long-term assets (investments) that have a useful life greater than one year. |
| Time Horizon | Short-term (typically one fiscal year). | Long-term (can span multiple years). |
| Focus | Recurring expenses (e.g., salaries, supplies). | Non-recurring, large expenditures (e.g., buildings, major equipment). |