What Are the Three Types of Financial Statements? Which One Suits My Firm Best?

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Business owners will find out at some time in the business history, (usually early on!) that they require financial information 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.



7 Park Avenue Financial :

South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Office = 905 829 2653

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com


Business financing for Canadian Firms , specializing in working capital, cash flow, asset based financing , Equipment Leasing , franchise finance and Cdn. Tax Credit Finance . Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations .

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR
Stan has had a successful career with some of the world’s largest and most successful corporations.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.

Stan has over 40 years of business and finance executive experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in depth, hands on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.

Stan Prokop



















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