Financial Statements for Businesses

Need Brief Description

Statements for businesses consist of three parts:

  1. Statement of financial position – a balance sheet that reports on a company’s assets, liabilities and equity at a given point in time.
  2. Statement of comprehensive income – an income statement that reports on a company’s income, expenses and profits over a period of time.
  3. Statement of cash flows – a cash flow statement reports on the company’s cash flow activities, particularily its operating, investing and financing activities.

What is the Difference Between a Compilation, a Review  and an Audit of Financial Statements?

Financial statements can be compiled, reviewed or audited by the CPA.  What does that really mean, and how do you know which one you need?  The level of service is determined by your needs which are more than likely determined by your creditors and/or investors.  The higher the level of service required, the more time we need as your CPA to complete the statements.

A compilation is the most basic level of service a CPA can provide with respect to financial statements.  In layman’s terms, we take financial information provided by the client and put it into the form of a financial statement with no opinion as to the information provided.  More specifically, we present information without undertaking to obtain or provide any assurance that there are no material modifications that should be made, that we comply with Statements on Standards for Accounting and Review Services (SSARS), that we do not contemplate performing inquiry, analytical procedures, or other procedures ordinarily performed in a review.  We are required to issue a report stating that we have not audited or reviewed the financial statements and accordingly do not express an opinion or assurance about whether the financial statements are in accordance with the applicable financial reporting framework.  Compiled statements generally give bankers/lenders the comfort of knowing that an accountant has read the financial statements.

The next level of service with respect to financial statements is a review.  Reviewed statements generally give bankers, creditors or potential purchasers the comfort of knowing that the statements are not materially misstated.  Specifically, the CPA performs analytical procedures and inquiries to provide a reasonable basis for obtaining limited assurance that modifications that should be made to the financial statements.  A review does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records; or other procedures ordinarily performed in an audit.  Again the CPA issues a report stating the review was performed according to SSARS, that the accountant is not aware of needed modification, and that the review is substantially less in scope than an audit.