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Your Bank > Education and Advice > CNB University

Financial Statements: Tools of Your Trade

T Stone
Tim Stone is Vice President and can be reached at TStone@CNBank.com or (585)394-4260 x36105.

Some “tools of the trade” are specific. Carpenters need hammers. Programmers need computers. Financial statements, however, are critical tools for all businesses. They allow you to monitor profitability, improve financial management, and provide banks and other lenders with vital information. Lenders are required to monitor your company’s performance and confirm your company’s ability to continue to service short and/or long term debt obligations.

Primary Tools

There are several financial statements. The two most well-known are:

The Balance Sheet: A quantitative summary of a company's financial condition at a specific point in time, including assets, liabilities and net worth. The first part of a balance sheet shows all the productive assets a company owns, and the second part shows all the financing methods (such as liabilities and shareholders' equity).

Income Statement: A summary of a management's performance as reflected in the profitability (or loss) of an organization over a certain period of time. In contrast to a balance sheet, an income statement depicts what happened over a month, quarter, or year. It is based on a fundamental accounting equation (Income = Revenue - Expenses) and shows the rate at which the owners equity is changing.

Level of Services

A CPA can provide different levels of service when it comes to financial statements. How you plan to use the statements and what is required by your lender will determine the level of review or verification required.

Compilation: The compilation is the lowest level of service that a CPA can provide for a client's financial statements. A compilation engagement requires less time than a review or audit engagement because fewer procedures are required. No assurances are made about whether the statements are presented fairly.

Review: Potential lenders may require more than a simple compilation. The CPA will need to provide limited assurance that, based on limited procedures, nothing came to the accountant’s attention that would indicate that material changes to your financial statements are necessary. That requires looking at your accounting policies and practices, how your business operates, the actions of your board of directors, recent changes in your business, and so forth.

Audit: In some cases, you may need to have audited financial statements prepared. This is the highest level of service and requires the CPA (auditor) to thoroughly examine your books and records and all of your financial policies and procedures. An auditor can state an unqualified or qualified opinion, depending on whether or not he or she agrees with how the company prepared the statements.

Recommendations:

  1. Review your loan documents and commitment letters to determine what level of statement is required and any other quarterly, semi-annual, or annual financial reporting requirements. 
  2. Contact your Commercial Lender or Relationship Manager to confirm financial reporting requirements. 
  3. Meet with your CPA before your company’s fiscal year end to discuss tax planning strategies and lender reporting requirements.