Guides and Articles
Financial Statements: Position, Activity and Cash Flow Reports
Understand balance sheets, income statements and cash flow reports, and how financial statement preparation differs from bookkeeping and other reporting work.
Financial statements present an organization's financial information in related reports. They do not all answer the same question. A statement about a position at one date differs from one describing activity over a period, even when both appear in the same reporting package.
Three Different Views
The SEC's financial-statement guide distinguishes a balance sheet's point-in-time position, an income statement's period activity and a cash flow statement's movement of money. It also describes a statement of changes in owners' interests.
These views explain why one headline figure is not the whole financial picture. An owner asking about recorded activity during a month is asking a different question from one asking what the organization owns and owes at the reporting date. A question about cash movements is different again.
Preparation Begins With Records
The underlying records may include bookkeeping information, account records and other supporting documents. Preparing statements organizes that information into the reports. It is different from creating missing records for the first time.
For example, a business with completed books can discuss statement preparation from those records. Another may need earlier bookkeeping or reconciliation questions resolved. Those tasks should be visible rather than hidden inside the phrase prepare the statements.
Dates, Comparisons and Explanations
A statement needs its entity, date or period and presentation context to be clear. Two reports cannot be compared usefully if one covers a different entity or span of activity without that difference being explained.
A prior-period comparison can also involve questions about presentation changes. Ask the preparer what is comparable and which explanatory material belongs with the reports. The explanation is part of understanding the information, rather than assuming two matching column headings settle every question.
Preparation and Examination Are Different
Producing statements and carrying out a separate review or audit engagement are different services. The accompanying report should identify the work performed. A polished presentation alone does not identify the nature of that engagement.
Management reports, payroll summaries and tax returns also have their own purposes. They may use related records but are not interchangeable with a set of financial statements.
Common Questions
Is the bank balance the same as the period's reported result?
No. Account balances, period activity and cash movements are different views. Ask the preparer to explain the relationship in the relevant reports.
Does statement preparation include an audit?
Not automatically. Ask which engagement is proposed and what its accompanying report means.
Who offers preparation?
Explore accounting firms and discuss the reports, records and period involved.