Fair Value Accounting For Financial Instruments: Essay

Question:

Discuss about a Report on Fair Value Accounting For Financial Instruments?

Answer:

Introduction

Barrow (2011) opines that for every business organization, financial statement analysis is of great essence. An effective analysis of the financial statements helps a business organization to evaluate their respective future business strategies in accordance to their financial health status. This report will highlight the financial status of the organization Universal Health Services and based their financial status, several recommendations will be given. The organization is one of the largest health and social business firms in United States and is listed as New York Stock Exchange (Uhsinc.com, 2015)

Review of the financial statements

The major financial statements of the organization are income statement, balance sheet and cash flows. The total amount of cash flows has a direct impact on the working capital management of the organization. From the income statement, the total amount of expenses and receipts are derived. The profit derived from the income statements is added to the balance sheet of a respective firm.

In case of Universal Health Services, the total amount of cash flows is positive that is $1036 which is also higher than the previous years.

The financial statements of the organization reflect that the net revenue of the organization is $8065 million in the financial year 2014 which is higher than the previous years. The profit margin of the organization is also on the higher side with $545 million in the financial year of 2014 which is higher than the previous financial years. The earnings per share of the organization have also increased considerably with 5.21 per share. In terms of financial ratios, the current ratio of Universal Health Services is 1.11, while the debt equity ratio of the organization is 0.86. The organization has performed well in comparison with the last financial year of 2013, where its current ratio was 1.07 and debt equity ratio was 0.99. In terms of efficiency ratios of the organization, the inventory turnover ratio of the organization is on the lower side, with 8.53 which is may lower than in the year of 2013 (44.08). This reflects that the organization is inefficient in the management of inventory. Though, the total amount of sales and net profit has increased, but, the return on equity ratio of the organization has declined from 17.13 to 15.61 from 2013 to 2014. However, the working capital is on the higher side, though the management of inventory is lower. Therefore, the current status of the financial statements will have a major impact on the various stakeholders group of the organization that is the employees, investors and shareholders (Financials.morningstar.com, 2015).

Employees- The employees will be happy as the profitability of the organization Universal Health Services has increased and the organization is successfully expanding its branches with proper sources of income. In addition to this, the financial reports of the organization also reflect that the salaries and wages of the employees have increased in the financial year 2014 in comparison with the last financial year. This is a very good sign for the employees. On the contrary, the long term debt of the organization has increased and goodwill has declined. This can play a negative impact on the mindset of the employees.

Investors- The return on equity of the firm has declined in comparison with the financial year of 2013. This will have a negative impact as return on equity reflects upon the percentage of return on the capital invested by the investors of the firm. The debt-equity ratio of the firm is on the lower side, which may have a positive effect upon the investors (Eun & Resnick, 2012).

Shareholders- The share prices of Universal Health Services are increasing at an increasing rate. Presently, the share price is 142.83 which were around 81.33 in the year 2014. This further suggests that the shareholders of the organization will be happy with the performance of the organization in the share markets. However, the return on shareholders’ equity is lower and the long term debt has also increased. Therefore the share prices may fall in the future based on their fundamentals (Madura, 2012).

Current industry trends effecting the financial performance

The current industry trends among the hospital industry reflect about the fraudulent claims from the patients. This has direct impact on the value of inventory and amount of goodwill of the organization. Another impact is regarding with the code and conduct of the hospital industry.

This may have a negative impact on the customers due to several false and fraudulent claims. Therefore, it is recommended that the organization Universal Health Services needs to minimize the amount of false claims on the customers and improve their status of goodwill on the eyes of the stakeholders. This will further have a positive impact over the performance of Universal Health Services (Sch?nbohm, 2013).

Recommended strategy to improve financial performance

The organization Universal Health Services needs to improve the price of their inventories in order to improve their inventory turnover ratio. The organization also requires nullifying safety stock within their inventory system. This will also increase the sales of the firm and will further improve the return on equity and return on capital employed. The management of Universal Health Services needs to implement better forecasting techniques to minimize the variances of the financial performance. In addition to this, the organization needs to fulfil the requirements of all their stakeholders to improve their long term financial performance. Apart from this, the organization may also improve their short term working capital cycle to meet short term requirements. The organization may also cut down their operating expenses in order to improve its profit margin (Barrow, 2011).

The organization can implement the given strategies by proper division of short term and long term requirements. In addition to this, the organization may implement the FIFO method in order to clear off their inventory by a large percentage. In addition to this, the organization may give more amounts of returns to the shareholders by declaring a higher rate of dividend. This will also fulfil the requirements of the stakeholders by a large extent (Blankespoor, et al. 2013).

Conclusion

It is concluded that financial analysis plays an effective role to design the strategic objectives of any organization. The information resources that were used annual reports, company websites and financial sites. Several strategies have been recommended for the organization Universal Health Services in terms of its financial performance in the last financial year.

References

Blankespoor, E., Linsmeier, T. J., Petroni, K. R., & Shakespeare, C. (2013). Fair Value Accounting For Financial Instruments: Does it improve the association between bank leverage and credit risk?. The Accounting Review, 88(4), 1143-1177.

Barrow, C. (2011). Practical financial management. London: Kogan Page.

Bekaert, G., & Hodrick, R. (2012). International financial management. Boston: Pearson.

Eun, C., & Resnick, B. (2012). International financial management. New York, NY: McGraw-Hill.

Madura, J. (2012). International financial management. Mason, OH: South-Western, Cengage Learning.

Ramsden, P. (2011). Financial Management. London: Hodder Education.

Financials.morningstar.com,. (2015). Growth, Profitability, and Financial Ratios for Universal Health Services Inc Class B (UHS) from Morningstar.com. Retrieved 7 July 2015, from

Lasher, W. R. (2013). Practical financial management. Cengage Learning.

Sch?nbohm, A. (2013). Performance measurement and management with financial ratios: the BASF SE case (No. 72). Working Papers of the Institute of Management Berlin at the Berlin School of Economics and Law (HWR Berlin).

Uhsinc.com,. (2015). Annual Report Archive - Universal Health Services. Retrieved 7 July 2015, from How to cite this essay: