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What are the Three Types of Financial Statements – Which one suits my firm best?

Guest post by: Stan Prokop

Article Overview: The article provides an overview of the three main types of financial statments that are required by business owners, other stakeholders, and lenders .

What are the Three Types of Financial Statements – Which one suits my firm best?

Business owners will find out at some time in the business history, (usually early on!) that they require financial statements to satisfy essentially two bodies - shareholders/management, and, secondly, lenders!

There are essentially 3 types of financial statements:

Audited

Review Engagement

Internal

Audited Statements - Companies who require audited financial statements. Why does a company require an audited financial statement? Business owners quickly realize this type of statement comes with a very significantly higher cost. So why the need? The best way to describe the need is that there is an important interest in the company, and that interest comes from an owner /shareholder, or lender. The audited statements report to those two parties and validate that the auditor , an independent third party, is saying that the financial represent the true picture of the company , and if there are any serious inadequacies then those are pointed out .Any ' inadequacies' relate to GAAP , which , stands for Generally Accepted Accounting Principles '. Let's use a quick example. There are primarily two methods that corporations use to count and record inventory. If the company was using an alternative method, the auditor would point out that the GAAP is in effect being broken. That's a quick simple example. We are most familiar with public companies requiring audited financial statements. That is because a public company has usually thousands of investors. They, 99% of the time, don't get to meet management or see the company. They rely on the audited financial statement to reinforce the credibility of the financials. Audited statements are costly and time consuming to prepare, and require significant company and auditor inter-action. However the importance of the audited statement can't be over emphasized.

Review Engagement Statements - This type of financials statement ranks 2nd in the hierarchy of financial statements. (Audited is # 1!). Review Engagement Statements are prepared by a 3rd party accountant; however they come with only 3 basic elements to them.

1.The accountant should have a ' reasonable knowledge of the company'

2.His questions, comparisons, and discussions should provide an inference that the financial statements seem reasonable

3.The statements should be presented in a manner acceptable to GAAP ( even though individual accounts aren't checked )

Internal Financial Statements - These are exactly what are inferred. They are financial statements prepared internally for management, or for monthly reporting to their bank. We can essentially say that management or the third party accountant simply collects information, summarizes it, and notes that information is somewhat restrictive in nature as it lacks the additional due diligence in Notice To Reader and Audited statements .

In summary, there are 3 times of financial statements. They are given various weight and significance based on who prepared them, and how, and under what standards of accounting competency. A start up firm might start its history with internal statements, as the company grows it would be required by lenders and other stakeholders to prepare Notice to Reader Statements. As the company grew very large, and went public perhaps the need to prepare Audited Financials would be a necessity.

Business owners and financial managers should continually be determining if the type of statement they currently prepare satisfies current needs, and management should also be looking at the next evolution in the company's financial reporting needs.

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Article Tags: Types of Financial Statements



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