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.
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.
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.
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.
