Introduction
Financial statements of a company are accessed by various users such as potential investors, customers, suppliers, government, and debt providers for various reasons. Financial statements as they are provide users with a narrow insight into the financial strengths and weaknesses of a company. This calls for the need to carry out a comprehensive review of financial statement so as to understand various components of the statements. The paper reviews the financial statements of Addus Health Care Services for the year 2010. The company is a publicly trade health care organization which has been in operation since1979. It provides widespread health care services such as “nursing, personal care aides and rehabilitation” (Addus Health Care Services, 2009a). Further, the health care organization operates in 19 states including South Carolina.
The relationship between the income statement, balance sheet and statement of cash
The three most popular financial statements seem independent but they are interrelated. The balance sheet statement forms the basic building block of the financial statements. The income statement shows how the assets and liabilities in the income statement s are used to generate income. While the cash flow statement shows the changes in the components of the balance sheet items from year to year. Another less commonly used financial report is the statement of stockholders equity. It also feeds information on total stockholders’ equity at the end of an accounting period to the balance sheet. The cash flow statement gives the cash in hand at the end of the accounting period. The same information is available in the balance sheet.
The income statement is prepared to show the net income earned by a company at the end of an accounting period. The net income resulting from preparation of income statement is used in the preparation of balance sheet and statement of cash flows. The table below shows the net income of the Addus Health Care Services for 2010 and 2009.
Source of data – Addus Health Care Services, 2009b
A company can either distribute the amount of net income earned to shareholders as dividends or plough back into the business. In most cases, as in the case of Addus Health Care Services, the amount of net income at the end of the year is added to the retained earnings in the balance sheet. This results in growth of the account over time. Similarly, net losses reported in the income statement account are posted to the retained earnings account. This reduces the amount of retained earnings accumulated over time. The calculations of the relationship between net statement of income and statement of balance sheet are shown in the table below.
From the calculations, result of the income statement causes changes in the retained earnings account in the balance sheet as seen in the increase of the retained earnings account from ($54, 000) in 2009 to $5,074, 000 in 2010. Further, the income statement is connected to the balance sheet when computing stakeholders’ equity. Statement of stakeholder’s equity computes the net change in owners’ equity for the period under review. From the balance sheet, we obtained opening balances of stakeholder’s equity. This value is adjusted using changes in preferred stock, additional paid up capital, and retained earnings from the income statement to obtain total shareholders’ equity at the end of the period. The table below shows how the balance sheet and statement of income are related through the statement of stakeholders’ equity.
The table above shows the relationship between the balance sheet and income statement though the statement of the stakeholder equity. This relationship yields the total stakeholders’ equity at the end of 2010 amounting to $88,091, 000 which is shown in the balance sheet under liabilities and stakeholders’ equity.
The cash flow statement gives the cash in hand at the beginning and at the end of the year which is used in the balance sheet as cash in hand. In the statement of cash flow, the net income from income statement forms the starting point of computing net cash flows from operating activities. The relationship is shown in the table below.
In conclusion, the illustration above shows a strong relationship between the balance sheet, statement of income and statement of cash flows because of output of one financial statement is used as an input of another statement.
References
Addus Health Care Services. (2009a). Annual reports. Web.
Addus Health Care Services. (2009b). Company profile. Web.