Compiling financial statements involves gathering and organizing financial data from various sources within a company. The raw data is then processed, classified, and summarized into meaningful financial reports, such as the balance sheet, income statement, and cash flow statement. This process aims to present a comprehensive and accurate picture of the company’s financial health and performance during a specific period. The financial statements are essential for decision-making by stakeholders, including investors, creditors, and management, as they provide valuable insights into the company’s liquidity, solvency, profitability, and cash flows.
## Financial Statement Elements
Financial statements are compiled from financial data gathered from the trial balance and other sources. The financial statements include the balance sheet, income statement, statement of changes in equity, and statement of cash flows. These statements provide a summary of the financial position and performance of a company.
Financial statements are based on the accounting equation:
“`
Assets = Liabilities + Equity
“`
This equation means that the total value of a company’s assets must be equal to the total amount of its liabilities and equity.
The balance sheet shows the financial position of a company at a specific point in time. It lists the company’s assets, liabilities, and equity.
The income statement shows the financial performance of a company over a period of time. It lists the company’s revenues, expenses, and profits.
The statement of changes in equity shows the changes in a company’s equity over a period of time. It lists the sources of equity, such as investments by owners and profits, and the uses of equity, such as dividends and withdrawals.
The statement of cash flows shows the changes in a company’s cash position over a period of time. It lists the sources of cash, such as operating activities and investing activities, and the uses of cash, such as capital expenditures and debt repayment.
## Financial Statement Elements
The financial statements include the following elements:
* **Assets** are the resources owned by a company. They include cash, investments, property, plant, and equipment.
* **Liabilities** are the amounts owed by a company to others. They include accounts payable, notes payable, and bonds payable.
* **Equity** is the residual interest in the assets of a company after deducting liabilities. It represents the ownership interest of the owners of the company.
* **Revenue** is the amount of money earned by a company from selling goods or services.
* **Expenses** are the costs incurred by a company to generate revenue.
* **Net income** is the amount of revenue minus expenses.
Financial Statement Compilation Standards
Financial statement compilation is the process of putting together financial statements from the information provided by a client without expressing any assurance thereon. The accountant is not required to perform any procedures to verify the accuracy or completeness of the information provided.
- The accountant must follow the AICPA’s Statement on Standards for Accounting and Review Services (SSARS) No. 21, “Compilation of Financial Statements.”
- The accountant must obtain a representation letter from the client.
- The accountant must read the financial statements and inquire of the client about any unusual matters.
- The accountant must prepare a compilation report.
| Compilation Procedure | Description |
|---|---|
| Obtain a representation letter from the client | The representation letter should state that the client is responsible for the accuracy and completeness of the information provided to the accountant. |
| Read the financial statements and inquire of the client about any unusual matters | The accountant should read the financial statements to identify any unusual matters. The accountant should also inquire of the client about any unusual matters that the accountant becomes aware of. |
| Prepare a compilation report | The compilation report should state that the financial statements are the responsibility of the client and that the accountant has not expressed any assurance thereon. |
Steps in the Compilation Process
Financial statement compilation is the process of assembling and presenting financial information from a client’s records without expressing any assurance on the accuracy or completeness of the information.
- Planning and Preparation: The accountant gathers information about the client’s business, including its accounting system, industry, and financial situation.
- Data Collection: The accountant collects financial data from the client, such as bank statements, invoices, and receipts.
- Analysis and Adjustment: The accountant analyzes the data to identify any errors or inconsistencies. Adjustments may be made to correct errors and bring the data in line with applicable accounting principles.
- Financial Statement Preparation: The accountant prepares the financial statements, including the balance sheet, income statement, and statement of cash flows.
- Review and Finalization: The accountant reviews the financial statements with the client and addresses any questions or concerns. The statements are then finalized and issued to the client.
| Phase | Tasks |
|---|---|
| Planning and Preparation |
|
| Data Collection |
|
| Financial Statement Preparation |
|
| Review and Finalization |
|
Auditor Responsibilities
In the context of financial statement compilation, auditors are not responsible for providing any level of assurance on the compiled financial statements. Auditors do not issue audit opinions or review reports on compiled financial statements.
Instead, the auditor’s responsibilities in a compilation engagement are limited to the following:
- Reading the financial statements and making inquiries of management as necessary to obtain a general understanding of the information presented in the financial statements.
- Applying analytical procedures to identify any unusual or inconsistent relationships or trends in the financial statements.
- Inquiring about whether the information in the financial statements is consistent with the underlying accounting records.
- Issuing a compilation report that describes the nature of the compilation engagement and the level of assurance provided.
And there you have it, folks! The ins and outs of compiling financial statements, made easy-peasy. Whether you’re a small business owner or just curious about the nuts and bolts of finance, we hope this article has given you the lowdown.
Thanks for sticking with us through this financial journey. Remember to drop by again for more finance wisdom or if you want to dive deeper into the world of money management. Until then, keep your cash flowing and those assets growing!