Hans Kasper, MS-CPA, PS

Business Financial Statements
 

For small business owners, financial statements are the most poorly understood facet of their business.  In a good economy, this lack of understanding will cause a lower production of profits.  In a bad economy, it will cause the business to fail and you will not know why.

Financial statements consist of:

• a Balance Sheet (also called a Statement of Financial Position),

• an Income Statement (also called a Profit and Loss Statement), and

• a Statement of Cash Flows, and,

• depending on the level of reporting on the financial statements, may also includes Notes to the Financial Statements.

The Balance Sheet tells you the assets, liabilities, and equity of the business and the details about them.  You can compare a Balance Sheet to a house.  The house has a value of $300,000 (asset), a mortgage of $200,000 (liability), and equity of $100,000.  Do you see how that balances?  Asset = Liability + Equity.  That is why it is called a Balance Sheet.

The Income Statement tells you how much money you made or lost during the period(s) under consideration.  It could be a month, a quarter, a year, or years.  It tells you how much revenue you produced, what your expenses were to produce those revenues, and the difference between the two being the net income or loss.

I have heard people say, "How can I have a loss in the business?  I took money out of it to live on!"  Yes, but unfortunately, that was borrowed money or a built up cash reserve that has dwindled away.  Maybe you didn't pay your suppliers.  Maybe you had a business line of credit that you borrowed on. 

I have also heard people say, "I couldn't have made a profit!  If I did, then where is all the money?"  In these cases, the profits are tied up in uncollected accounts receivable or were used to pay liabilities incurred in prior years.

That is why the Statement of Cash Flows is so important.

The Statement of Cash Flows tells you the cash flow net income of your business, how you financed the company during the year, and what the non-operating cash flows were.  It tells you where the money went.

To be a success in business, you must understand these financial statements, their inter-relationships, and how to make them work profitably for you.  You can still be a success without understanding them, but then you are relying on luck and, like the lottery, the odds will be against you.

There are three major types of reports that a CPA can issue on your financial statements and they are:

• a Compilation Report,

• a Review Report, or

• an Audit Report.

A Compilation Report is the lowest level of report that can be issued on your financial statements and is the least expensive.  The work performed by the CPA is limited in scope to the reading of the financial statements prepared by the client to assure that no material modifications need to be made to the statements.  This type of report is not a review report or an audit.

A Review Report is the middle level of report that can be issued on your financial statements and is more expensive than a compilation.  The work performed by the CPA is limited in scope to:

• the reading of the financial statements prepared by the client to assure that no material modifications need to be made to the statements,

• questions asked of the owner and staff concerning the company and the financial statements, and

• analysis of the financial statements in comparison to benchmarks and prior periods.

This type of report is not an audit.

An Audit Report is the highest level of report that can be issued on your financial statements and is much more expensive than a compilation or a review.  The work performed by the CPA is not limited in scope and includes:

• all of the work performed in a Review Report, and

• an audit, based on a review of internal controls, of supporting documentation and the books and records of the company.

If you are a small business, most banks will want you to have a compiled set of financial statements reported on annually.  A mid-sized company, will need a reviewed set of financial statements.  A publicly held company will need to be audited due to SEC regulations.

Please call me at 425-485-7853 to assist you with any of these financial statements.  I do not provide audits of financial statements.

 

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