A small collection of accounting jargon translation….
Consolidated Financial Statements
“Consolidated” financial statements are financial statements that consolidate, or combine, the financial statements of two or more companies into one set of statements. This is relevant to you if your company is comprised of a two or more related companies (e.g. a parent and subsidiaries). If you own two companies but they are unrelated apart from the fact that you, personally, own them both, then you don’t consolidate.
Interim Financial Statements
“Interim” financial statements are financial statements for periods that are not year-end. These are often prepared for management and reporting purposes, so that management, directors, shareholders, banks and others with a vested interest in doing so can get an update as to how the company is doing without having to wait for the official audited financial statements which are prepared after year-end—sometimes months after. These statements are often unaudited, that is, there is no review by an independent auditor and no audit opinion. For example, in my company, we prepare unaudited interim financial statements every month.
Unlike the audited financial statements, interim financial statements may include just the basic statements, Balance Sheet (aka Statement of Financial Positions and Statement of Profit & Loss (aka income statement), without any notes.
Notes to the Financial Statements
“Notes” to the financial statements serve as an addendum to the numerical statements and provide additional information on the company, its accounting policies, significant transactions and events over the course of the periods included in the statements and additional information on the balances provided in the numerical statements. The purpose of the notes is to give the reader of the financial statements more context to understand the numbers and have a better feel for the company’s situation.
For example, suppose you entered into a loan agreement to borrow $1 million. As of year-end, the amount you still owe will be included as a liability in the balance sheet, the amount of interest you paid during the year will be included in the statement of profit & loss and any cash you received from the lender or paid back to the lender will be included in the statement of cash flows. That’s great, but that isn’t enough for someone to really understand the impact of this loan on your current and future activity. Is the interest rate good or bad? How about the payment terms? Are they reasonable and manageable given the company’s resources or do you have to come up with $1 million within six months? Did you have to give the lender equity in order to get the loan? Sell a kidney? In order to provide a more complete picture, in the notes, a section will be added with the loan details: the original amount, the interest rate, when and how the loan is to be paid back, any security issued for the loan and any other key terms and requirements.