Your financial statements need to be a fair representation of your company’s financial position and operating performance, especially when third parties (e.g., creditors, investors, et cetera) are involved.

If you are applying for credit for your business, you will be asked for financial statements, including a Balance Sheet.  While most small business owners don’t undergo a review, compilation, or audit of their books for third party creditors (these can be very expensive), you still want to be confident of your company financials.  A lot of small business owners do not seem aware of the gravity of submitting business financials, which need to be free from material misstatements, to third party creditors.

The following are the five most common over-stated assets.  Avoid falling into these pitfalls:

  1. Overstatement of Cash, Short-Term Investments, and Marketable Securities
  2. Overstatement of Receivables and Inventory
  3. Overstatement of Fixed Assets.  Examples include:
    • Leaving worthless or expired assets on the books (not writing them off)
    • Understating deprecation expense
    • Recording fixed assets at inflated values
    • Revaluing assets at “fair market value” versus leaving them at cost minus accumulated depreciation
    • Related third-party buyers can also come into play here.
    • Ratios to test: Current ratio, Quick ratio, Current assets/Total assets, Marketable securities/Current Assets, Cash/Current assets
  4. Overstatement of Assets through Mergers and Acquisitions or by Manipulating Intercompany Accounts or Transactions
  5. Overstatement of Intangible or Deferred Assets.
    • To capitalize costs, the costs must have been incurred for the purpose of generating FUTURE revenues and those revenues must BE LIKELY to be generated.  If costs do not meet these requirements, they should be expensed when incurred.
    • Ratios to test: Total deferred charges/Total assets, Total deferred charges/Total intangible assets, Deferred charge write-offs (amortization)/Deferred charge balance

Disclaimer: Unfortunately, it is impossible to give comprehensive financial, accounting, or bookkeeping advice through the internet. Before relying on any information given in this article or on GetAGripOnAccounting.com, contact an accounting professional to discuss your particular situation.