 Accountant vs. CPA  Types of Financial Statements:  Audited  Reviewed  Compiled  Agreed Upon Procedures  Notes: The Story Behind the Numbers  Basis of Accounting:  GAAP  Cash Basis  Tax Basis  Current Climate Financial Statements: What You Need to Know

 CPA  Majored in Accounting 150 credit hours  Passed CPA Exam  1 yr experience in CPA Firm  40 hours CPE each year  Licensed by the State Board of Accountancy  Typically more expensive  Accountant/Bookkeeper  No requirements at all Accountant vs. CPA

Types of Financial Statements  Key: Level of Assurance from Accountant  Assurance = Responsibility  Responsibility translates to types of “testing” CompiledReviewedAudited Low High Assurance Level

 Audited:  Accountant’s Assurance Level: Expression of an opinion  Minimum Requirements for Accountant:  Test financial statements as deemed necessary, to gain reasonable assurance that they are fairly stated in all material respects  Must be independent  Statements must include notes  Assess controls and report deficiencies Types of Financial Statements

 Audited (cont):  Tests Typically Include:  Tests of existence of assets (physical observation)  Directly confirming certain assets and liabilities  Other testing of account balances  Get written representations from attorneys Types of Financial Statements

 Reviewed:  Accountant’s Assurance Level: Limited assurance that no material modifications should be made but still express no opinion  Minimum Requirements for Accountant:  Accumulate evidence to support the financial statements via:  Understanding of industry, client, and material risks  Application of analytical procedures to financials  Inquiries of management and other personnel  Must be independent  Statements must include notes  Do not have to assess controls Types of Financial Statements

 Compiled:  Accountant’s Assurance Level: None and express no opinion  Minimum Requirements for Accountant:  Present information, consisting of management’s representations, in the form of financial statements  Not required to make inquiries or corroborate information supplied by management unless information is found to be inaccurate, incomplete, or misleading  CAN issue a report if not independent  Statements do not have to include notes  Do not have to assess controls Types of Financial Statements

 Useful when there are specific concerns the client wants addressed rather than overall financial statement presentation  The CPA performs only those procedures outlined by the client and reports the findings but does not give an opinion  Example: If a potential investor is interested in the collectability of a prospect’s accounts receivable, the investor may engage a CPA to perform procedures to test the accuracy of the receivables aging, such as testing to invoices, confirming balances, etc.  The CPA would report the results of the testing but would provide no assurance as to the collectability. Agreed-Upon Procedures

 Financial Statement Footnotes:  As important as the numbers are, often the information behind the numbers is equally if not more important  Some key information required to be included in the footnotes, as applicable, includes:  Key accounting policies such as how revenue is recognized or how assets are valued (cost vs. fmv)  Allowances for uncollectible accounts and obsolete inventory  Potential accruals for uncertain tax positions taken by the company Notes: The Story Behind the Numbers

 Financial Statement Footnotes (cont):  Some key information required to be included in the footnotes, as applicable, includes (cont):  Debt information including:  Terms  Collateral  Guarantees  Transactions with related parties  Lease information including:  Terms  Future commitments  Other commitments such as guarantees, purchase agreements, profit sharing plans, owner buy/sell agreements, etc. Notes: The Story Behind the Numbers

 Financial Statement Footnotes (cont):  Some key information required to be included in the footnotes, as applicable, includes (cont):  Any contingent liabilities such as outstanding law suits  Any events subsequent to the reporting period that may impact the financials Notes: The Story Behind the Numbers

 GAAP (Generally Accepted Accounting Principles):  Also referred to as accrual basis  Key Standards:  Revenue recognition – Recognized when a good/service has been passed on to the customer  Expenses – Recognized when a good/service has been received  Inventory – Reported at the lower of cost or market value  Fixed Assets – Recognized at cost and depreciated over the useful life of the asset  Investments – Reported at fair market value  Bad Debts – Recognized when collectability is questionable Basis of Accounting

 Cash Basis:  Pure Cash Basis (rarely used) – revenue and expenses are recognized when cash is received or disbursed. Balance sheet would only include cash and equity.  Modified Cash Basis (used more frequently) – allows the following exceptions to the Pure Cash Basis:  Property and equipment are recognized as assets and depreciated  Debt is recognized and amortized  Accruals for employee withholding not paid but relate to compensation paid Basis of Accounting

 Tax Basis:  Basis of accounting that is substantially identical to what is reported on the tax return  Key Standards:  Can be either cash or accrual basis – which drives when revenue and expenses are recognized  Fixed assets - Depreciated using IRS prescribed lives and methods  Also could use accelerated incentives such as section 179 and bonus depreciation  Investments - Stated at cost and no unrealized gains/losses are run through the income statement  Bad debts – Recognized when collection is no longer pursued Basis of Accounting

 Banking World  Typically in the non-public, for-profit sector, banks dictate the types of financial statements in their debt agreements.  We are seeing more and more banks tighten the screws to these agreements in requiring GAAP basis financials that have been either reviewed or audited depending on the debt level and perceived risk.  This has been a trend since the banking crisis 5 or so years ago. The banks are more conscious of the completeness of their files and are imposing more restrictive covenants. Current Climate

 Accounting World  Convergence with International Standards  Key differences: Revenue recognition, fair market valuation, lease presentation, and inventory valuation  No decision expected in near future  Private vs. Public Standards  There is currently a push for separate reporting standards for privately held companies  No current time-table on decisions Current Climate

 Contact Information: James B. Mersman, CPA – Partner Dolinka, VanNoord & Company PLLP 360 E. Beltline NE, STE 200 Grand Rapids, MI (616) Thank You