Preparing your company for an audit can be overwhelming, especially if you’re unfamiliar with the auditing process and GAAP audited financial statements. Generally, there are three critical financial statements your CPA firm will assess during an audit: the balance sheet, the income statement, and the cash flow statement.
3 GAAP Audited Financial Statements
Regularly checking and analyzing your company’s financial statements is critical to running a successful business and completing an audit without bumping into significant issues. The three most common GAAP audited financial statements are similar, but each represents different business operations and performance. You should keep tabs on these statements to help your lenders understand your company’s performance and to help the CPA auditors complete the audit.
1. The Balance Sheet
Balance sheets represent a company’s assets, liabilities, and equity over a certain period, usually a quarter or a year. Typically, auditors will assess three sections of the balance sheet during private company audits: assets, liabilities, and owner’s equity. A company’s assets, or anything of value the company holds, must be equal to its liabilities (what it owes) and the owner’s equity, including its shares, earned income, and net worth.
A good formula to keep in mind when preparing and analyzing your balance sheet is:
Assets = Liabilities + Owner’s Equity
As the name suggests, the balance sheet helps determine if a company’s income and expenses are balanced. This is what your CPA will assess when completing a GAAP audit. Balance sheets help investors understand their ROIs and help companies understand their capital structure.
2. The Income Statement
The income statement is part of the trio of GAAP audited financial statements that require attention. This financial statement, also known as the Profits and Loss (P&L) Statement, is a detailed summary of all earned income and your company’s expenses over a period of time. This statement is essential for a GAAP audit because it goes hand-in-hand to tell the complete story of your business’s performance.
Generally, an income statement includes several critical factors, including, but not limited to, revenue, expenses, gross profits, and net income. A good income statement includes as many details as possible.
Your CPA firm will analyze your income statement using two analysis methods: vertical and horizontal analysis. A vertical analysis means your auditor reads your income statement from the top down to explore your company’s performance improvement. If an auditor analyzes your report horizontally, they compare your business’s growth from year to year, identify trends in the data, and compare your company to others in the industry. A horizontal analysis best aligns with GAAP audits.
3. The Cash Flow Statement
The cash flow statement is the third of the three most common GAAP audited financial statements. It describes a company’s operating, investing, and financing activities. The cash flow statement helps determine if your company’s cash flow is positive or negative. A negative cash flow statement represents more money flowing from your company than what comes in. This could highlight a problem for investors.
Your CPA firm will analyze your cash flow statement in two ways: direct or indirect. The direct method analysis subtracts all cash collections from cash disbursements. An indirect method means your accountant makes allowances for cash paid and received at various times throughout a specific period. This means that the calculated difference can be compared to the net income.
Understanding GAAP Audited Financial Statements
GAAP audited financial statements are necessary for the success of any business. We have over 75 years of accounting experience at Assurance Dimensions, and we’re ready to partner with you to complete your next financial statement audit.
Contact us today to learn more about our audit services.