Tag Archives: financial statement

Financial Statement – Who Needs It?

The Financial Statement for your business is probably the single most referred to report that your company will produce. It comprises several other documents including the Balance Sheet and the Profit and Loss statement and provides all of those looking for a complete financial picture of your business with a detailed account.

So, who actually uses the information in a financial statement? Which groups of people find such things essential and why?

Owners & Managers
First and foremost you will need the information yourself as the owner of the business without the information in a financial statement it would be very difficult to make any important business decision. Anyone that you may have put in charge of your company will also need to access the financial statement not only in order to run things on a day to day basis but to allow them to provide more detailed reports to shareholders.

Shareholders
If someone has a vested interest in the success or failure of your business they will often require seeing regular and up-to-date financial statements to check on their investment; if they need to withdraw funds the financial statement lets them know what if anything is available.

Lenders
Anybody who is considering extending finance to your business has to have access to your business’ financial statement; whether a high street bank or an independent investor, they will be looking to ensure that you are a safe bet to pay the money back with interest.

Investors
Before any potential investor makes a decision to put money into your venture, they will want to view your business’ financial health, the way that they will do this is by looking at your financial report; investors, like lenders, will want to judge your company sound, so that they can guarantee a return on their investment.

Staff
Employees may need to see the firm’s financial statement at one time or another, to work out anything from compensation, to their prospects for promotion.

Suppliers
Anyone selling anything to your business that may be looking to extend credit terms will want to assure themselves that you can pay and that you are not going to end up on their bad debtor list.

HMRC
The Government will need to see your business’ financial statement regularly, as assessing your tax requirements and checking that you are paying your dues is probably one of the most important reasons for the statement’s existence.

Media
Believe it or not there are many reasons why the media and/or the public at large may be interested in the financial statement your business produces, especially if you are a firm in the public eye or with whom they feel a special connection; also large employers in certain areas will be of interest as their success or failure is often tied in with that of the community as a whole.

Never has one business report meant so much to so many; it really is the ‘go to’ report for anyone who needs to make a decision based on the financial health of your company and as such is probably one of the most important things your business will ever have to say.

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Article Source: http://EzineArticles.com/?expert=Leo_Thomas

Preparing Financial Statements From Incomplete Accounting Records

For many small businesses, record keeping can be a nightmare. Worse still, can be when financial statements are required and limited information is available. Small businesses are compelled by tax and banking laws to furnish financial statements on request. So there is no getting away from financial statement preparation.

Financial statements are hundred percent reliant on accurate records. So a bookkeeping and accounting system is imperative. Full advantage is not taken, of bookkeepers and accountants offering their services, it has been proven that up to 25 percent to 30 percent of small businesses still don’t engage the available accounting services on the market.

Invariably records would be incomplete in such a business. Creative methods, such as those used in forensic accounting or internal auditing will have to be enforced to reconstruct the records of a business. It is an arduous task but can turn out to be very fulfilling, when a clear picture emerges of the true state of the business.

Steps 1. Locate all the information of the businesses. Documentary proof of sales, purchases, bank statements, contracts, notes and correspondence. 2. Determine if a system of recording transactions is in place. 3. Verify if a computerized or manual system is being used for the recording of data.

Now the fun begins. Opening and closing debtors, creditors and bank balances will be extracted. Should not be too difficult, since every small business owner knows exactly how much money he/she is owed (debtors), and how many outstanding bills he/she has (creditors), and off course how much money is in the bank.

By adding the debtors closing balance, and the verified debtors deposits and payments, and deducting the opening debtors balance (payments+ closing debtors-opening debtors) the periods credit sales are determined.

Similarly the creditors balances are used to determine credit purchases.

The bank statement is then evaluated to determine cash sales and cash purchases. Cash invoices and bills are also checked and added to sales and purchases.

All expenses are then verified by tabulating bills. Salaries are checked. If time is lacking, one-month verification on salaries, rent and other recurring items are sufficient. Just double check if no increment or escalation occurred during the period. The one-month verification multiplied by the amount of months would equate to the full expenses for the year. The income statement can now be concluded.

The balance sheet items can be verified by separating cash asset purchases from normal expenses. All assets purchased on lease can be split between the liability and asset portion. Debtor’s creditors, and cash/bank balances (from balancesabove) are added, and we will have an asset and liability statement. Asset less liabilities will produce an equity figure, and voila, the balance sheet can now be finalized.
Check again how equity (capital funds-less profits), tie up to income statement profits. Source third party opinions to verify the integrity of figures, i.e. creditors for balances due, deeds and motor vehicle registration offices for value of assets etc.

It is no easy task, and figures will not be 100 percent accurate, but a fair picture will emerge of the financial position of the business. This article is not conclusive, but can give the business owner some insight to the kind of procedures his accountant will follow. After preparing the first set of financial statements from incomplete accounting records, the business owner should be strongly advised, to invest in the services of a bookkeeper or an accountant.

 

 Contact the Author
Sean Goss
sgafc@mweb.co.za

 

 

 

IFRS and Fair Financial Statement Presentation

Many accountants believe that they are doing an excellent job when preparing financial statements. Many financial statements however, fall far short of the requirements of generally accepted accounting practice, as well as the new International Standards For Financial Reporting (IFRS).

 

Unfortunately, there is no escaping fair presentation, even for small business. All businesses, be it a huge corporation, or a small business is compelled by laws to present proper financial statements.

 

Currently, for small and medium sized business, a financial reporting model has been published by IFRS, for discussion, by its affiliate members within the global accounting community. In as much, as this format will be a refined to a less complex guideline, fair presentation will not be done away with.

 

Fair presentation is even more important in the small business environment than in the bigger corporate market. GAAP, as it was always understood was meant to draft financial statements in such a manner that it could be understood and interpreted by lay people on the street.

 

GAAP has further been enhanced by additional prescriptions coming from IFRS, so as to ensure that financial statements are a) reasonable and b) uniform with applicable standards internationally.

 

Ironically GAAP is not enforced at final financial statement preparation, but at initial entries into the books of account. If proper accounting standards are not applied at this level, all subsequent reports will result in an inadequate disclosure in the financial statements. A perfect example would be cash advances received, for work/projects to be completed.

Wrong                                                              Dr                              Cr

Bank                                                              XXXXX                                                                                        

Income                                                                                          XXXXXX

 

Correct

Bank                                                              XXXXXX

Received in Advance (creditor)                                                  XXXXXXX 

 

If the project in question is not finalized at financial statement preparation date, and it was wrongly entered, the GAAP becomes questionable.

 

 

During the entire accounting process, vigilance is necessary, to ensure that entries are written up in a manner, to enable application of GAAP.

 

Another minefield is fixed assets and liabilities.

Fixed assets are depreciated according to useful or economic life, not tax rates. Assets should also be revalued from time to time (which rarely happens in small business), the importance of a fixed assets register, can therefore not be overlooked.

Long term Liabilities should clearly define whether they interest bearing or non-interest bearing. Interest bearing borrowings should be split between interest and capital charges, clearly disclosed on the notes of financial statements.

Yet again, proper bookkeeping is essential, with an amortization schedule throughout, specifically for the interest and capital portions of the loan. 

 

This article barely scrapes the surface of fair presentation and all the amendments being issued, but hopefully some light can be shed on some of the most salient points.

 

Final financial statements, complying with GAAP and IFRS, is very neat in appearance, and makes it much easier for the users (shareholders, owners, banks), to traverse the complicated information presented therein