In many small and even medium-sized companies, financial reporting during the year does not include all of the adjustments made at the year-end (often in connection with the audit or review of the annual financial statements by an independent professional accountant). Sometimes, the missing adjustments are not readily available during the year, such as a management bonus that depends upon total net income or a tax provision that cannot be fully determined until the tax returns are prepared. Other adjustments are not prepared simply because no one chooses to focus on them.
Typical “adjustments” that are often only prepared at year-end include:
- Bad debt provisions
- Overheads in cost of sales and inventory
- Warranty reserves
- Write-offs of obsolete or damaged inventory
- Depreciation expenses, updated for fixed asset acquisitions or disposals
- Interest expenses, updated for new debt or retired debt
- Royalties receivable or payable
- Income tax expenses
- Current portion of long-term debt
- Capital leases
However, some of these items may be significant to understanding the company’s monthly or quarterly results. Management, investors and bankers often carefully review changes from month to month or quarter to quarter. Before attempting to compare monthly or quarterly results, organizations should contemplate numerous adjustments, otherwise the results may be misleading; consider, for instance, providing for obsolete inventory, bad debts, warranty costs and any other similar items, and estimates for income tax expense and bonus expense.
Readers can find more information on these adjustments in policy FN 7.01 – Generally Accepted Accounting Principles in Finance and Accounting PolicyPro.
For smaller enterprises that have not previously followed the practice of preparing GAAP-based financial statements even at year-end due to their cost or complexity, CPA Canada’s Accounting Standards for Private Enterprises may make it more cost effective to prepare financial statements that follow GAAP. This will make your banker and investors much happier.