By Yigang Xu, CPA
XU CPA, LLC
Although the term financial statements is oftentimes associated with large corporations and Wall Street, but small businesses also will run into situations that a formal financial statement is needed. The most common users of small businesses financial statements are 1) banks and other creditors; 2) licensing and regulatory entities; 3) potential buyer or investor of the business.
Before you jump right to the phone book and look for a CPA to issue you a set of financial statements. There are several things that you need to be informed to help you save money and make the right decision.
There are generally three types of financial statements, and the cost to do them varies significantly:
One. Audited Financial Statements:
An audited financial statement is the most comprehensive of the three, in this type of engagement, a CPA will need to have a thorough understanding of your business, your industry, and assess various risk and even fraud risk. Auditor will examine major accounts and transactions, from your bank account, receivable, payables, loans, sales, cost of goods sold, and in some cases, auditor will also test contingency, and write to your lawyer regarding potential legal issues.
Overall, an audit provides the highest level of assurance to readers and users, but it is very expensive for small businesses, it can easily cost you thousands of dollars, and it usually takes longer time to produce.
Two. Reviewed Financial Statements:
A reviewed financial statements is less comprehensive compared to an audit, in this type of work, a CPA will still need to have a good understanding of your business and your industry, but a CPA will not examine evidences and look into everything of your business like an audit, instead, a CPA will generally perform some analytical procedures, such as inquiring you the owner and manager, comparing your numbers to your competitor and industrial and look for obvious problems.
Overall, a review still provides some level of assurance to readers and users, but not the highest as compared to an full audit, it is generally cheaper than an audit, but it can still be quite expensive, it usually takes less time to produce compared to an audit.
Three. Complied Financial Statements:
The last of the three basic types of financial statements is called a compilation, strictly speaking, a compilation is simply a CPA taking your numbers and information and compile them into a set of financial statements. In theory, a CPA will not examine any of your accounts or information, unless there are some very obvious problems.
Overall, a compilation does not provide assurance to readers and users, but it does ensure proper formatting, styles and footnotes of your financial statements. It is generally the cheapest among the three, and the choicest for a small business owner.
One more useful thing to point out, there is another type of financial statements commonly called a no-note-compilation, it is a compilation but with all the GAAP required footnotes to a financial statement omitted. You may not know, but footnote disclosures are very tedious under current reporting requirement, you are required to disclose many information on top of your balance sheet and P&L, so a no-note-compilation takes the least amount of time, and if your bank will accept it, will be the ideal situation for a small business.
Make sure to talk with your bankers or creditors before you sign any loan covenant or condition document, ask them what types of financial statements is required to satisfy the loan covenant. If you can, try to negotiate with bankers to get a compilation or maybe a review if you have a relatively big account with them. If you need financial statements to obtain license from government, now you understand the three different types of financial statements and which one will cost you the most or the least amount of money, you are now informed and ready to talk with your CPA.
Thanks for reading.
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Disclaimer: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.