The purpose of Financial Statements is to provide users with a fair and accurate picture of a company’s assets, liabilities, and capital at a given point in time and its operating results over a period of time. The preparation of Financial Statements is the responsibility of company management, who in turn rely on their accountants, who have specialized knowledge and training in this area. Financial Statements are mostly used by business owners and executives to manage their businesses, and they form the basis for any discussion about profitability, trends, growth, and value. Financial statements are also essential to tax planning, where vital opportunities to save money are uncovered.

The two principal Financial Statements are the Balance Sheet and the Profit & Loss Statement (P&L) - also known as the “Income Statement.” The Balance Sheet is a statement of the financial value or worth of a business at a particular date, usually at the end of its fiscal year or at fixed intervals throughout the year. The Balance Sheet shows the businesses’ assets (cash, receivables, and equipment), liabilities (payables, debt) and capital (owners equity and retained earnings). The Profit & Loss Statement is a record of total income and expenses over a period of time. It is helpful to think of the Balance Sheet as a snapshot of the business at a given time and the Profit & Loss Statement as a video of business operating results over a period of time.

At times, a business may need a Certified Public Accountant (CPA) to certify its Financial Statements. This typically happens when the business seeks to raise money, either through financing or investors. Potential lenders and investors will often not rely solely on management’s representation of their business results and they will frequently require that the company’s Financial Statements are “attested” to by a CPA. The two types of statements that CPAs can issue are the Audit and the Review. Both require the CPA to perform substantial amounts of testing procedures on company data with the goal of giving third parties a level of assurance that the Financial Statements are materially correct. Audit procedures are more extensive that Review procedures, and hence the Audit is a higher standard of assurance. A Compilation, in which the CPA merely presents the business results in the form of Financial Statements without any testing, offers no level of assurance.