MANAGEMENT
Consider your external Chartered Professional Accountant when preparing internal financial statements.
To run an owner-managed business successfully, it is not enough just to track the movement of funds in and out. Statements providing the type of information needed by your external CPA are also essential because the external accountant is the intermediary between your business and the Canada Revenue Agency, creditors, a potential buyer and others who need the special financial statements only your external accountant can produce.
In-House Statements
Internal accounting systems process daily sales, purchases, and payroll transactions; effective owner-managers review the general ledger bank balance, accounts receivable, accounts payable and the payroll summary on a regular basis. Management needs these in-house financial statements to meet some if not all of the following requirements:
- All provincial corporations’ acts require financial data to support financial statement filing requirements.
- Shareholders have a right to yearly financial statements based on recorded transactions.
- Creditors may require regular financial statements to evaluate the quality and sufficiency of collateral covering a loan and to ensure the loan conditions are being met.
- Potential investors may want to review monthly financial statements to evaluate throughout-the-year performance.
- Comparable monthly historical financial statements give valuable information to a potential purchaser if the owner-manager retires or sells all or part of the business.
- Financial decisions based on monthly facts and figures provide insight for planning and budgeting.
- Comparative financial statements can reveal whether changes in sales or expenditures are creating variations in the bottom line. Such comparisons allow management to take corrective action and ward off potential working capital problems.
- In-house financial statements establish how management is guiding the company.
- Financial statements provide information about the availability of sufficient assets to meet liabilities.
- Operating results provided by financial statements inform management whether action is needed to increase sales, cut production costs, or reduce wage costs.
- Properly structured income statements provide insight into the cost of production compared to sales. As a result, management can more rapidly decide whether sales prices need to be increased or job costs better controlled.
- Monthly financial statements show errors in environmental, tax, payroll, pension, workers’ compensation, GST/HST or employee health tax remittances.
The external CPA usually makes some adjustments.
External Accountant
Before company accounts are ready for a third-party user, the external accountant usually has to make some adjustments to provide the information in the form needed by the third party. Consider the following:
- Data provided by an in-house system designed to give information about the day-to-day operations must be distilled into a summary format that provides information in accordance with Canadian financial statement disclosure requirements.
- Statements prepared by an independent accountant lend credibility to the corporate entity because the preparation is independent of internal bias.
- Reporting requirements change regularly and must be reflected in the financial statements.
- Independent preparation of financial statements may identify anomalies within the corporate records, which need review to ensure they are correct. For instance, capital assets purchased may have been expensed.
- Preparation of financial statements by your external accountant usually identifies items that are income tax sensitive such as shareholder draws, penalties and interest or personal use of corporate vehicles that may have to be adjusted.
- An external review may determine whether the valuation of assets is accurate or whether capital assets should be written down or accounts receivable amounts should be written off.
- The external accountant ensures that comparative figures are truly comparative, not only to ensure a better analysis of progress throughout the years, but also to provide insight as to the reasons for material variations in the event lenders or regulatory authorities question the differences.
Periodic Statements
In order to prepare year-end financial statements, your accountant needs quality information produced by your accounting system. The regular preparation of financial statements allows your CPA to fully understand the financial performance and position of your business. Because CPAs have significant experience in a multiplicity of businesses, they are able to determine the benchmarks your particular business should meet and maintain.
Your Business Is Their Business
In the final analysis most external accountants would agree that you know your business better than they do, but they know business better than you. Working with your accountant and helping them understand your business will ensure the financial statements provided to management, third parties and regulatory and tax authorities adequately explain the corporation’s financial position and operational results for the year.
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Source: BUSINESS MATTERS
Disclaimer: BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
BUSINESS MATTERS is prepared bimonthly by the Chartered Professional Accountants of Canada for the clients of its members.
Richard Fulcher, CPA, CA – Author; Patricia Adamson, M.A., M.I.St. – CPA Canada Editor.
Contact us: patricia@adamsonwriters.ca