In order to counteract financial fraud and limit the likelihood of a business to engage in fraudulent financial reporting an accounting process known as auditing is used by many companies and in the case of publicly traded companies auditing is required.
An audit is defined as an examination of the financial accounts and the reporting of financial activities for business entity that’s performed by an individual or company that’s independent of the business entity that’s being audited.
The types of financial reports that are audited include: The balance sheet, income, stockholders equity and cash flow statements and any financial information or notes that summarises or explains the accounting procedures and techniques that are used by a business.
Breaking Down Your Business’s Three Go-To Financial Reports:
Of the Big Three Financial Statements, the balance sheet is the only one that shows the financial health of a company at a given moment. Instead of listing your business’s income and expenses like the income statement does, the balance sheet is a two-sided chart with three components.
One side lists the value of what you owe your liabilities and any owner equity including your retained earnings. While the other lists the value of what you own and who owes you assets:
To determine the relationship between the three amounts, accountants use a simple equation for corporations, the equation looks like this: Assets = Liabilities + Shareholder’s Equity.
The profit and loss statement (aka income statement) shows your revenue, costs, and expenses during any given period of time. The statement is the best view into your bottom line, or net income. It’s typically used to show business lenders and investors whether your company has made or lost money during a given period.
Cash Flow Statement
Your cash flow statement shows each and every one of your company’s incoming and outgoing transactions. How you’re spending your money and how you’re earning your income over a period of time. The cash flow statement takes your business’s net income and takes any non-cash transactions into account. From operations, investing or financing activities to give you a picture of exactly what happened to company’s cash during that period.