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Compiled Financial Statements: A Comprehensive Guide

Financial statements are crucial tools that provide a snapshot of an organization’s financial health and performance. Among various types of financial statements, “compiled financial statements”, previously known as NTR (Notice to Reader) financial statements, play a vital role in offering valuable insights into the financial standing of a business. In this blog, we will delve into the world of compiled financial statements, exploring what they are, their components, their significance, and when they are necessary for businesses and organizations.

What Are Compiled Financial Statements?

Compiled financial statements are a set of financial reports prepared by a Certified Public Accountant (CPA) at a professional accounting firm. Unlike audited financial statements, compiled financial statements are not subjected to the same level of scrutiny or verification. Instead, they are based on information provided by the company’s management. The primary purpose of compiled financial statements is to present financial information in a structured format that is easily comprehensible to stakeholders, including investors, creditors, and regulatory bodies.

Components of Compiled Financial Statements

  1. Balance Sheet: This component presents the financial position of a company at a specific point in time, highlighting its assets, liabilities, and shareholders’ equity.
  2. Income Statement: Also known as the profit and loss statement, it outlines the company’s revenues, expenses, and overall profitability over a defined period.
  3. Notes to the Financial Statements: These additional disclosures provide further context and details regarding specific items in the financial statements, offering a more comprehensive understanding of the company’s financial performance and position.

Significance of Compiled Financial Statements

While compiled financial statements do not undergo the rigorous examination process of audited financial statements, they still hold significant value for businesses, especially smaller enterprises, non-profit organizations, and start-ups. These statements provide a clear overview of the financial health of a company, aiding in decision-making processes, financial planning, and assessing the overall performance of the business. Additionally, compiled financial statements can be a useful tool for internal management to monitor and track the company’s financial progress.

When Do You Need Compiled Financial Statements?

Businesses and organizations often require compiled financial statements in several scenarios:

  1. Internal Assessment: Compiled financial statements are useful for internal assessments, allowing companies to evaluate their financial standing and make informed decisions about future investments and growth strategies.
  2. External Stakeholders: External stakeholders, such as current or potential investors and creditors, may request compiled financial statements to assess the company’s financial stability and determine its creditworthiness.
  3. Compliance Requirements: In some cases, regulatory bodies or lenders (like a bank) may require businesses to submit compiled financial statements to ensure compliance with specific financial reporting standards.

How are compiled financials statements different than just exporting statements from your accounting software?

When preparing compiled financial statements, a CPA follows a set of standard steps to ensure the accuracy and completeness of the financial reports. Here are the typical steps involved in the process:

  1. Gather Financial Data: The CPA begins by collecting all the necessary financial data from the client, including the general ledger, bank statements, accounts payable and receivable records, and other relevant financial documents.
  2. Organize and Review Financial Data: The accountant then organizes the financial data to ensure that all the information is complete and accurate. They review the data for any discrepancies, errors, or inconsistencies that need to be addressed.
  3. Prepare Financial Statements: Using the organized financial data, the CPA prepares the compiled financial statements, including the balance sheet, income statement, cash flow statement, and notes to the financial statements. They ensure that the statements adhere to the relevant accounting principles and standards.
  4. Consider Accounting Policies and Standards: The CPA ensures that the compiled financial statements are in compliance with the Generally Accepted Accounting Principles (GAAP) or any other applicable accounting standards, depending on the specific requirements of the industry and the organization.
  5. Communicate with the Client: Throughout the process, the CPA maintains clear communication with the client to discuss any discrepancies, clarify financial data, and address any potential issues. They may seek additional information or clarification from the client to ensure the accuracy of the compiled financial statements.
  6. Provide Disclosure and Explanatory Notes: The accountant includes necessary disclosure and explanatory notes to provide context and additional information that may be important for understanding the financial statements. These notes often include significant accounting policies, contingent liabilities, and any other relevant information that might impact the financial position or performance of the organization.
  7. Final Review and Compilation Report: Before finalizing the compiled financial statements, the CPA conducts a comprehensive review to ensure the accuracy and completeness of the financial data. They then issue a compilation report that outlines their responsibility for compiling the statements based on the information provided by the client. This report also emphasizes that a compilation does not provide assurance on the accuracy of the financial statements.
  8. Deliver the Compiled Financial Statements: The CPA delivers the compiled financial statements to the client for their review and use. They may also offer guidance and recommendations based on the insights provided by the compiled financial statements.

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