Reading Financial Statements 101 – Quick Tips To Identify Potential Errors

May 15, 2018

The last thing your company or organization wants is unreliable financial statements. Your partners, investors, lenders and especially your company’s bottom line depend on numbers from your accounting department that you can comprehend and trust.

To minimize the potential for errors, make sure that the following criteria are met when reporting your numbers:

Balance Sheet

Asset accounts should have debit balances and liability accounts should have credit balances.
As long as your outstanding checks do not exceed your bank balances, there should be no negative cash.
Accounts receivable and accounts payable balances should tie to their respective aging reports.
All company loans and credit card balances should have their own separate general ledger accounts set up (if any).
There should be a distinction between current and long-term assets and liabilities.
Intercompany due to/from account balances should net to zero on consolidated financial statements.
Current year retained earnings should tie to the year-to-date net income or loss reported on the Income Statement.

Income Statement

Income accounts should have credit balances and expense accounts should have debit balances.
Cost of sales should include only the direct costs attributable to the production of goods or supply of services. It should not include costs such as those that relate to sales or marketing.
There should be separate accounts for payroll expense and employer payroll taxes.
There should be no unexplained material swings in balances from period to period or from budget-to-actual balances.

Cash Flow

The statement should be divided into three major categories: operating, investing and financial activities.
Beginning cash should tie to the ending cash of the prior period, and ending cash should tie to the cash amount stated on the balance sheet for the respective period.

If your financial statements do not follow these simple guidelines, this may be an indicator that there are errors in your financial reporting. In this case, your external or internal accountant, needs to address the issues immediately, or at least explain to your satisfaction, the logic behind the decisions made.

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