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Financial Statement FAQ
1. What is a financial
statement?
2. What are the differences
between balance sheets, income statements, and cash flow statements?
3. You mentioned levels of statements
as set forth by the accounting profession's standards. What
are these levels?
If you have any other questions, please
contact us.
1. What is a financial statement?
A financial statement is any
of several reports generated by an accounting system. Financial
statements include balance sheet, income statement, cash flow
statement, and other documents that show the financial position
of an individual or entity. Such statements can provide corporate
or household/family management with the information needed to
judge past financial performance and adjust for the future accordingly.
While many reports from many sources are referred to as financial
statements, only those prepared in accordance with professional
standards are generally accepted as independent statements for
many business purposes.
In addition
to the different types of statements, there are also different
levels of assurance on those statements as set forth by the rules
of the accounting profession.
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2. What are the differences
between balance sheets, income statements, and cash flow statements?
A better name for a balance
sheet might be "a list of assets and debts."
Your balance sheet shows what you own and what you owe with the difference being your
net worth. Since balance sheets are as of a given date,
they are like a still photograph taken at some single point in
time.
An income statement is also
called the operating statement or the profit and loss statement
(the "P & L"). It is the summary of the sales and expenses of
a company for a specific period of time, such as a month, quarter,
or year. It is the moving picture that tells how a company
got from one balance sheet date to another. For example,
if a company's net worth (as shown on the balance sheet) increased
by $100,000 from one balance sheet date to another, the income
statement will show the volume of sales and expenses necessary
to create that change in net worth.
A cash flow statement is another
management report showing the source of cash received and disbursed
for a given accounting period, such as the past month, quarter,
or year.
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3. You mentioned levels
of statements as set forth by the accounting profession's standards.
What are these levels?
There are four accepted levels.
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The basic level is a
financial statement that carries no report from a CPA regarding
the level of assurance of the financial information presented.
The statement is based entirely on data provided by the entity
and can be used only for internal management purposes.
Financial statement standards require the client to sign an
engagement letter certifying that the statements will not be
provided to outsiders.
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A compilation is
a set of financial statements prepared from information that
is the representation of management, with a reading by a CPA
to determine whether the financial statements appears to be
free of obvious errors. It provides no assurance on the
accuracy or completeness of the financial statements.
Compilations are often used for internal purposes, but in many
cases are accepted by third parties.
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A reviewed financial
statement has been subjected to analytical procedures and
inquiries by the accountant. Because its scope is substantially
less than an audit, a review provides limited assurance of the
accuracy and completeness of the financial statements.
-
An audit opinion
on a financial statement is the result of an intensive process
for testing the material accuracy and completeness of the financial
statements and the underlying accounting records. It is
the highest level of assurance a CPA can provide regarding the
integrity of the financial statements.
Note: WJH no longer
audits financial statements. However, we can recommend an
auditor or help you evaluate potential auditors. If you
need help in that area, please
contact us.
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