Tools of the Trade: Financial Statements
Sep 11, 2014
Some “tools of the trade” are specific. Carpenters need hammers. Programmers need computers. Financial statements, however, are critical tools for all businesses. They allow you to monitor profitability, improve financial management, and provide banks and other lenders with vital information.
There are several financial statements. The two most well-known are:
- The Balance Sheet shows the assets of your business and the amounts it owes (liabilities) on a particular date. The difference in the two numbers is the amount of owners’ equity.
- The Income Statement is a summary of your business’ revenue and expenses over a certain period of time. It reveals your income (or loss) from core operations and then incorporates other income and costs and any extraordinary items to arrive at a net income figure.
Level of Services
A CPA can provide different levels of service when it comes to financial statements. How you plan to use the statements will determine the level of review or verification required.
Compilation. If you want reports mainly for internal use, a CPA will simply compile the figures you provide and prepare the appropriate statements. No assurances are made about whether the statements are presented fairly.
Review. Potential lenders will generally require more than a simple compilation. The CPA will need to provide limited assurance that, based on limited procedures, nothing came to the accountant’s attention that would indicate that material changes to your financial statements are necessary. That requires looking at your accounting policies and practices, how your business operates, the actions of your board of directors, recent changes in your business, and so forth.
Audit. In some instances, you may need to have audited financial statements prepared. This is the highest level of service and requires the CPA to thoroughly examine your books and records and all of your financial policies and procedures. Then, the CPA can provide an opinion about your statements.