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March 2018 Tip of the Month

THEY'RE NOT OUR FINANCIALS - THEY'RE YOURS

How to catch a CPA off guard during tax season when we're engulfed in 2017 tax returns, the new law and 2018 planning? Talk to us about your financial statements.

 

Are your income statements providing you with a reliable measurement of the operating performance of your firm? You might be surprised by this question, but frequently company managers obtain data deficient for sound decision making. What? You think just because you're using Quickbooks for your small sole proprietorship or sole member LLC you so report on schedule C of your personal tax return you can't equally benefit? Just consider:


* Operating statements prepared on a cash basis may be highly effective for measuring cash flow but they fail to reflect the true results of operations since they don't reflect sales and expenses not paid.

* Key elements may be missing from the statements. For example, sales may only be reflected on a net basis, but the information would be far more meaningful if the statement showed gross sales less return and allowances and net sales.

* Many estimates used in the income statement may not reflect the actual economic deterioration associated with the wearing out of assets. This is often the case in the depreciation recorded or of repair and maintenance costs required to keep assets in good working condition.

* Failure to properly consider obsolescence of inventories or the carrying costs of goods can easily distort gross profit margins reflected in the income statements.

* Lapses in insurance coverage may cause significant risk exposure not reflected in insurance expense or elsewhere in the income statement.

* Since the income statement may reflect several business activities or products producing revenue for your firm, good results in one activity may actually obscure negative results in another, unless the activity is separately identified and the results for each product or service are measured separately to determine their contribution to your firm's income.

* Individual income statements generally fail to provide a valid measure of business progress, unless a series of statements are compared and trend analysis is performed.

To help you obtain reliable information about the results of your operations, you must (1) use a method of accounting that truly reflects the economic events affecting your business; (2) have a chart of accounts that explains the revenues obtained and expenses incurred in operating the business; (3) utilize estimates realistic in measuring the decline and deterioration of the assets producing your business revenue; (4) have cost measurement systems that provide revenue and cost data by product and activity, and (5) obtain operating statements with sufficient frequency to enable you to measure the trend of revenues and expenses and changes in your firm's growth momentum.