Now that the January 20, 2025 due date for financial reporting has come and gone, companies with calendar year ends will be submitting their inhouse year-end financial information. Analyzing the inhouse year-end statements is an important part of the performance analysis process. Many times stakeholders wait until the accountant prepared financial statements are available before analyzing performance. That approach extends the time before analyzing results and also does not allow the stakeholder to assess the accuracy of interim reporting during the current year.
Why should stakeholders review inhouse year end statements?
The speed of receipt of the inhouse year end statements compared to the receipt of accountant prepared year end statements is a key reason to review the inhouse year-end statement. Often companies will encourage their lenders and other stakeholders to wait for the accountant prepared statements, but it is important to review year-end results with the speed at which you review monthly statements.Â
Businesses often use the last month of the year to clean up balance sheet items and correct any income statement items related to standard costs and accruals. Looking at the December month end report compared to previous month end financial reports could provide insight on the methods for updating standard costs, inventory counting and accounting entries, accrual and prepaid account clean up, and other matters that affect balance sheet and income statement results for the year. This review could show where there are weaknesses in financial reporting that the company has identified. For example, if the company does not do monthly inventory test counts, they may do test counts at year end and identify larger adjustments. Or, if the company has not updated standard costs the company may identify inventory valuation adjustments required based on the potential sale price and the inventory count. This is also a time where you might see bonus accruals increase in anticipation of unexpected year-end bonus payouts.
Stakeholders will be able to compare the performance in the final month of the year to the performance in the eleven preceding months and that can help a stakeholder understand how to anticipate year-end adjustments in future years.
Why not wait until the accountant prepared statements come out?
Sometimes stakeholders believe they will be duplicating their efforts if they review the inhouse year-end results and the accountant prepared year-end results. Actually, reviewing both year-end statements side by side is a key indicator of the magnitude of accountant prepared year-end adjustments. As a user of financial statements, the stakeholder must understand the type of accountant prepared adjustments and the size of those adjustments. Stakeholders need to understand the impact of adjustments on gross margin, operating profit, and working capital valuations.Â
Analysis of the inhouse year-end statements and the accountant prepared year-end statement after adjustments, gives a stakeholder a view into potential weaknesses in the finance and accounting staff or processes. For example, if a company has material inventory count adjustments once the accounting firms does their physical count, the company may need to increase its use of test counts. Or, if a company has a material inventory valuation adjustment, the company may need to address standard costing more frequently. If there are large accounts receivable write offs or reserves, the accounts receivable staff may need more resources or more support from the sales department when attempting to collect outstanding balances, or the accounts receivable staff may need to review customer credit limits. If there are large accrued expense changes, the company’s accounts payable department may need to be evaluated for the methods related to invoice approvals and invoice entry into the accounts payable system.
The internal management of the company should use the year-end adjustments as a learning tool to improve financial reporting throughout the year.Â
External stakeholders should use year-end adjustments when evaluating profitability and working capital components throughout the entire year.
Analysis is key
Understanding the changes to financial reporting at year end helps all stakeholders better understand the company. It is not unusual to have year-end adjustments, but those adjustments should be used as a tool to help the company improve its financial reporting and its performance throughout the year.
If you would like to discuss inhouse year end financial statement reviews and how to best use resources, please call FMG. We are available to discuss what you are seeing, and we are able to provide ideas on questions and changes that those year-end statements could be pointing toward.
Juanita Schwartzkopf
Sr Managing Director, email j.schwartzkopf@focusmg.com | cell (520) 203.2926
Joe Karel
Managing Director, email j.karel@focusmg.com | cell (312) 307.1541