In the business of health care, it is essential to communicate an organization’s financial health and situation. The use of financial statements and its accompanying notes are useful in providing full disclosure of “position, results of operations, and cash flows of the organization in accordance with GAAP” all relevant information needed for the financial statements to constitute a fair representation of the financial position, results of operations, and cash flows of the organization in accordance with GAAP” (Finkler, Kovner, & Jones, 2007 p. 115). Another crucial method for assessing an organization's finances is with the use of ratio analysis. In the health care setting, there are five major classes of ratios used. This paper will describe the five most commonly used ratios in health care, define its purpose, and provide examples and interpretations from the financial statements provided by the University of California, San Diego Medical Center (UCSD) form June 30, 2010 and June 30, 2009.
Common Size Ratios
Common size ratios are used to make a comparison of organizations of different sizes. It is used to determine factors such as is a facility operating with the right amount of cash. It helps put data in proportion to an organization’s size (Finkler, Kovner, & Jones, 2007). Two examples include the ratio between cash to total assets and operating income to total revenue. According to the financial statements provided by UCSD (2011), the ratio of cash to total assets can be calculated as follows:
Cash to total assets = Cash/Total assets x 100%
$185,295 / $646,022 x 100% = 28.68% $150,789 / $568,892 x 100% =26.50%
Operating income to total revenue = Operating income / Total revenues x 100%
$110,832 / $ 834,289 x 100% = 13.28 % $94,336 / $784,457 x 100% = 12.02 %
These calculations show that in 2010, UCSD’s cash was 28.68% of its total assets and...