Volume 4 Issue 2007

When regularly prepared, financial statements are a useful internal management tool that can help owners and managers keep tabs on company operations and plan for growth. Statements also are used to tell a company’s financial story to “outsiders” — banks, insurers, leasing companies, major suppliers and customers, potential investors, and others who need reliable information about the business in order to assess its financial strength and earnings capacity.

Basic Statements

A balance sheet is a snapshot of a company’s financial position — its assets, liabilities, and equity — as of a particular date, such as the last day of the year. An income statement summarizes revenues and expenses for a period of time, often one year. A statement of cash flows gives information about the sources and uses of cash over the reporting period. Changes in equity over the period are often outlined in a statement of stockholder’s equity and sometimes in a separate statement of comprehensive income.

Additional Information

Usually, statements prepared for external use are accompanied by a section of notes. The notes give more detail about significant transactions and account balances. Additional detail about expenses and other items may be provided in supplementary schedules.

CPA Services

CPAs provide three levels of professional service with respect to financial statements:

• Compilation — The CPA assists the company in assembling its statements. The CPA makes no assurances about whether the statements are presented fairly.

• Review — The CPA performs limited procedures and, at best, provides limited assurance that, based on those procedures, nothing came to the CPA’s attention that would indicate that material changes to the statements are necessary.

• Audit — The CPA provides an opinion on whether the financial statements are presented fairly in conformity with generally accepted accounting principles.

Checking with potential financial statement users about their requirements can help companies determine which level of service will best meet their needs.