If your company has grown bigger and you need to secure a line of credit or look for new capital investment or financing, you are required to prepare a financial statement. A financial statement proves is the document that testifies to the health and growth of your company. It has to be audited by an independent auditor as required by law. There are several accounting documents and procedures that you have to follow to prepare for a financial statement audit. Take a look.
- The financial statement consists of your income statement at the end of the tax year. This includes your company’s gross earnings for the year and your company’s expenses, which are deducted from the gross income to arrive at net income at the end of the taxable year. This also includes your capital gains and losses.
- Next your accounting department will have to prepare the statement of retained earnings. This should show your retained earnings from the previous taxable year as well as the retained earnings at the end of the taxable year. This also includes your net income, which is taken from your income statement. Included in the statement of retained earnings are the dividends that have been paid for the taxable year.
- The next statement to be prepared is the balance sheet. This is a very critical document that forms part of your financial statement. This statement shows your assets and liability as well as shareholder equity. Make it a practice to prepare a balance sheet every month so that you can closely monitor how your business is faring. Your cash accounts shown in the general ledger should always be reconciled with your monthly bank statements. Your accounts receivable from the subsidiary ledger should also be reconciled with the general ledger to ensure that everything is recorded. You should have an accurate record of your inventory. This is one of the areas that get a lot of scrutiny during financial audits. This should include a year-end inventory balance as well as beginning inventory balance. Also included in the balance sheet are your liabilities, your deferred revenue if any as well as your company’s equity. Most financial audits focus on the balance sheets.
- The other document you have to prepare is a statement of cash flows. This shows the changes that occur in the cash balance ledger and shows where the company’s cash are disbursed for your company’s operating expenses, investing and financing. This is very variable and dependent on the amount of actual cash your company uses on a monthly basis. It is very important that everything is properly and accurately recorded, based on receipts.
Get your accountant to prepare the financial statement after a trial balance, gathered from all the other documents that have been prepared have been done. Some auditors require a narrative that will explain the contents of the financial documents and your ledgers. Your accounting staff should be able to properly record all the financial activities that happen on a daily basis in your company. Keeping clean and accurate ledgers will help you to prepare a good financial statement that will be ready for audit.