Reviewing a Company's Financial Statements at the End of the Year
A company’s financial statements are used to show a company’s performance over a certain period of time, generally including Balance Sheets and Profit and Loss. By being able to read a financial statement, you can determine where a company has made or lost money, where the money went, and how the company stands financially. The financial statement gives shareholders an account of how their investment is performing.
At each year end, we review Balance Sheets, Profit and Loss, Accounts Receivable, Accounts Payable, and Shareholders Account.
Before reviewing year end financial statements, there are a few things that we have to check first:
We should confirm that the company’s bank account is reconciled as of year end;
The company’s credit cards should also be reconciled;
We should confirm all invoices are entered for the fiscal year, even if you haven’t received payment from customers. This portion will be shown in Accounts Receivable;
We should confirm that all business expenses are entered for the fiscal year;
We should confirm that the Retained Earnings amount is the same as the last fiscal year’s Total Equity amount;
If there are any Shares Capital paid by shareholder that shows on Balance sheets, the Retained Earnings plus Shares Capital should equal to Total Equity amount.
👉🏻 Balance Sheets represent the assets, liabilities, and net worth or shareholder equity of the company.
Assets make up all the property the company owns including bank account, real estate, machinery, vehicle, etc.
An asset can also be intangible, such as trademarks or patents.
Liabilities consist of the money the company owes others. This can include leases on real estate, loans, accounts payable to suppliers of material, and tax liabilities. Liabilities also include employee payrolls and money borrowed from banks.
Shareholder equity represents the company’s net worth if it were to be liquidated, and what each shareholder would receive after paying the creditors of the company.
By reviewing Balance Sheets, we can open a Comparison Balance Sheets. This shows the amounts of the current and last fiscal year, allowing for comparison of the differences between the two in order to develop the cash flows, seeing where there are differences, and if there is anything that can be improved. For example, from the comparison sheet, we can easily find out which assets have increased, allowing us to do accumulated depreciation for them on the T2 filing.
On the Balance Sheets, each account can be drilled down to see the details. If you have any concerns about the amount, just double click to see the detail, and do some adjustments if necessary. If any accrued expenses had been entered in the last fiscal year, which wasn’t paid in this fiscal year, we will have to reverse it on the first or last day of this fiscal year, and do a new accrued expense at this fiscal year end if needed. If the accrued expense was paid in this fiscal year, reverse the accrued expense on the same day as the day accrued expense is to be paid. The RC, RT, and RP account balance shown on Balance Sheets should be equal to CRA’s balance.
👉🏻 Profit and Loss shows the company’s revenues and expenses during a particular period. It indicates how the revenues are transformed into net income. The purpose of the statement is to show owners and investors whether the company made or lost money during the period being reported. From this, we can open a comparison Profit and Loss for review. Each income and expense can be drilled down to see its details as well. If any expense accounts have increased more than last fiscal year, we should ask the owner to explain or make some adjustment to reclass or merge the expenses.
We try to make the financial statements similar to last year. For example, if the expense amount for some expenses is small and can be merged into others, we can simply combine them. If the revenue has increased, the expenses can be increased, but should still be reasonable. For every account, we should have supporting documents for each item on the financial statements. Even emails where we communicate with the owners should be saved, in case in the future we can’t remember where this amount is from. This is to protect ourselves. We should especially keep a copy of the assets receipts.
👉🏻 Accounts Receivable refers to the outstanding invoices a company has or the money the company is owed from its clients. If the amount is outstanding for more than 30 days, we should pay more attention and confirm with the owner whether that is correct or if adjustments needs to be made.
👉🏻 Accounts Payable is money owed by a business to its suppliers, shown as a liability on a company’s balance sheet, and includes GST payable or tax payable. When reviewing, we should confirm with the company’s owner on whether the Accounts Receivable and Accounts Payable amount is correct.
👉🏻 Shareholders Account is essentially a loan either to or from the company to a shareholder. As of year-end, if the Shareholders Account balance is negative, that means the company paid back too much on what is payable to shareholder. We usually treat this negative portion as dividends paid to the shareholder, and do a journal entry - debit to the Dividends Paid account, and file T5 for the shareholder in February of each year. If the shareholder’s account balance is positive, the shareholder can take the positive portion from the company’s bank account and would not need to pay any taxes on it.
Once we have done a review, we will need to ask the client to review and give an agreement for the financial statements, after which we will start doing T2 filing. Remember to lock your book on the last day of the fiscal year.
(*) This article is intended as general information only and is not to be relied upon as constituting legal, financial, or other professional advice. A professional advisor should be consulted regarding your specific situation.
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