Financial Statements and Accountant Opinions
Formal financial statements consist of a balance sheet, income statement, statement of changes in financial position, and footnotes. The balance sheet is a "snap shot" at a moment in time showing the company's assets, liabilities and equity. The income statement is like a "movie", showing the revenue and various expenses over a period of time rather than one point in time. The statement of changes in financial position is really just a fancy way of saying cash flow activity over a period of time.

Regulations and rulings regarding disclosures for footnotes are very complex, and generally cost a significant amount to prepare. Therefore, most small businesses usually dispense with this unnecessary expense.

A CPA can express three levels of assurance on your financial statements.

1. The first level is a compilation, which means that he or she has compiled the statements, but makes no statement as to their accuracy. Most banks will accept this level for loans under $250,000 outstanding. A compilation is obviously the lowest cost financial statement you can obtain.
   
2. A review is the second level of assurance a CPA can express. In a review, the CPA expresses limited assurance that the financial statements present a fair picture of the company. This costs significantly more than a compilation, since the CPA must perform a number of tests to be able to make such a statement. However, this level of opinion can save you a lot of money over the cost of an audit if the bank will accept it.
   
3. The most expensive level is an audit. Even an audit expresses an opinion that the financial statements present a fair picture of the businesses' performance. It does NOT guarantee (or even look for) employee theft, minor mistakes, efficiency, or even guarantee complete accuracy.

It is important to understand the limitations of financial statement opinions. You still need to monitor the daily activity of your business. Do not count on the accountant or CPA to do it for you, since they cannot (at least not at a price you can afford). Also, the wording of a compilation, review or audit may sound stiff and difficult to understand. The wording is dictated by various accounting pronouncements. Your banker will understand the significance of it.

An increasing number of CPAs are offering consulting services. These services can vary from helping you set up (or clean up) an in-house computerized set of books, giving you tax planning ideas, improving operational performance, etc. You should discuss these services and their pricing (usually an open ended hourly rate) with the CPA in advance of engaging them.