Compilation reports are essential tools for understanding your company’s financial health. A CPA prepares these reports by organising the data you provide into a clear and accurate format. While not as detailed as audits, they offer a reliable overview of your financial situation. In this guide, we will break down what compilation reports are and how they can benefit your business.
What Is a Financial Statement Compilation?
A financial statement compilation is when a CPA collects and presents a company’s financial data into standard financial statements. There is no deep checking or assurance, just a clean presentation of raw numbers.
Why Would a Business Use Compilation Financial Statements?
Great question! Businesses, particularly smaller ones, often go for compilation financial statements when:
- They do not need the whole muscle of an audit
- They are seeking loans, and the bank only requires basic financials
- They are preparing for a potential investor meeting
- They want to meet internal planning goals or tax filing prep
It’s a cost-effective way to show the financial picture without undergoing a financial MRI.
What is the Difference Between Compilation, Audit, vs. Review?
Let’s break it down real simple:
Audit
- Deep dive
- CPA verifies every nook and cranny
- High level of assurance
- Expensive and time-consuming
Review
- Limited scope
- Some analytical procedures
- Moderate assurance
- Less costly than an audit
Compilation
- No assurance
- Based solely on data provided
- Quick and cheap
- Ideal for internal use or low-stakes external users
Compilation vs. audit vs. review is a hot topic among finance professionals, but it all comes down to how much assurance you need and how much you are willing to pay for it.
Who Uses Compiled Financials?
Some everyday users of compiled financials include:
- Startups
- Sole proprietors
- Small to mid-sized businesses
- Nonprofits
- Landlords managing rental portfolios
These users typically need basic financial information for external users of the financial statements, such as banks, investors, or government agencies, that does not break the bank.
The Professional Touch of CPA Compiled Financial Statements
A CPA must compile the statements because only a licensed accountant can issue a compilation report, which is required to accompany the compiled financials officially.
So, if you’re wondering what a compiled financial statement is, know that the CPA’s stamp adds credibility, even if it’s not a full-blown audit.
What Does a Compilation Report Include?
A sample accountant’s compilation report typically includes:
- A disclaimer that the CPA didn’t audit or review the info
- A note on who provided the financial data
- The reporting period covered
- Any applicable accounting frameworks used
Compiled Financial Statements Example
Your CPA might compile your income statement, balance sheet, and cash flow statement into a neatly presented financial report. This compiled financial statements example would not be analysed for errors, but it would still reflect your financial status for the year.
Common Elements in a Compiled Financial Statement
Every compiled financial statement typically includes:
- Balance Sheet
- Income Statement
- Cash Flow Statement
- Notes to Financial Statements (optional)
What is a Compilation in Accounting Terms?
In accounting, a compilation involves taking raw data and formatting it into financial statements according to a specific framework, often GAAP or the cash-basis method.
So, if you have asked what compilation is in accounting, think of it as translating your messy financial scribbles into clean, readable reports.
How Are Compilation Financial Statements Prepared?
Here is the behind-the-scenes scoop:
- The client provides financial data
- CPA organises and formats the data
- No testing or analysis is done
- CPA issues a compilation report
When to Use Compiled Financial Statements
Compiled financial statements are helpful in various situations, particularly when you need a clear overview of your business’s economic health. A CPA reads these reports by organising the financial data you provide. They are ideal for smaller companies that don’t need the depth of an audit, but still require professional reporting.
Do Compiled Financials Meet GAAP?
Many firms that compile financial statements according to GAAP will note that in the compilation report. However, GAAP compliance is not required until a lender or regulatory body specifies it.
Benefits of compiled and reviewed financial statements
- Clear financial overview: Both compiled and reviewed financial statements offer a structured look at your business’s financial position, helping you understand your income, expenses, and overall financial health.
- Professional insight: A CPA provides valuable expertise in organising your data and verifying that your statements are authentic and well-structured.
- Better decision-making: These reports help business owners make informed decisions, whether it’s managing cash flow, securing loans, or planning for growth.
- Simplified for smaller businesses: Compiled and reviewed financial statements are often easier to understand than audited statements, making them an excellent option for small to mid-sized companies.
Common Misconceptions About Compilation Financials
- Not as detailed as an audit: Some people think compiled financials are just like audits. However, they are less thorough and don’t involve testing or verification of the data.
- They guarantee accuracy: A common misconception is that compiled statements confirm financial integrity. In reality, they depend on the data you provide, and the CPA simply organises it without certifying it.
- Only for large businesses: Many consider compiled financials only for big companies. However, small and medium enterprises can also benefit from these reports to keep their finances in order.
They replace audited financials: Compiled financials can be an alternative to an audit. However, they do not offer the same level of review and certainty.
