Incomplete financial statements is a term used to describe when someone has all the necessary information to complete a set of financial statements, but not all the information. This can be for external or internal purposes.
In Donavan, Inc.’s case, they have all the necessary information to complete their external financial statements, but they are missing some balance sheet items. By completing the missing amounts with estimation, you can complete their statements!
Internal financial statements are used more frequently within a business. These include budgets and forecasts that predict future outcomes. When people in the organization do not have all the information needed to complete these statements, then it becomes hard to plan for the future.
This article will talk about incomplete financial statements and how to calculate the missing amounts on the Donavan, Inc. external financial statements.
Calculate the missing amounts
Once you have the completed financial statements, you can now calculate the missing amounts. You can either do this yourself or hire a professional accountant to do so.
To do it yourself, you will need some accounting software like QuickBooks and experience using it. It will also help if you have taken some accounting courses and/or are professionally trained in accounting.
If hiring a professional accountant, they will most likely use QuickBooks and/or other software to calculate the missing amounts. They may charge by the hour or by the project, depending on how difficult it is to complete this task.
It is very important to check your company’s financial statements for the past five years to see if there have been any changes in numbers that look suspicious. This may be a sign of financial fraud and needs to be reported immediately.
The next item on the balance sheet is the total assets line. This is a summary of all of the assets the business owns. These can be merchandise, cash, inventory, property, etc.
Like the total liabilities line, this should be calculated by adding up all of the categories of assets. Typically, these are classified into either liquid or non-liquid assets.
Liquid assets are things that can be easily converted to cash, like cash or inventory. Non-liquid assets are things that cannot be converted to cash easily, like property or equipment.
The accountant will have to calculate the total asset line by gathering information from all of the managers and departments within the business. They will have to get information on both gross and net amounts for some of these assets as well.
The next item on the balance sheet is the total liabilities section. This is where the company lists all of its financial obligations. These include things like loans, mortgages, and obligations to suppliers and customers.
Listed here are all of the things that Donavan, Inc. owes to other entities as of this date. These can be in the form of cash or assets that can be traded for cash.
The first category is called short-term liabilities. These are financial obligations that Donavan, Inc. will need to pay within one year from the date shown on the balance sheet. Note that this does not mean that Donavan, Inc. will be paying this in one year- it just means that one year from now, these liabilities will still be valid and outstanding.
The second category is called long-term liabilities. These are financial obligations that Donavan, Inc. will need to pay after one year from the date shown on the balance sheet.
The net assets section is the last section on a balance sheet. It lists the total value of all assets, including inventory, cash, property, and other assets. It also lists the total liabilities and how that totals to less than all of the assets.
Net assets is also referred to as owner’s equity. This is because it shows how much value the business has due to its owners. How much an owner would earn depends on their labor and how much they invested into the business.
For example, if someone owns a business and put in $100,000 of their own money into it but did not work very hard to manage it then they would only earn $100,000 as a return on investment. If they worked very hard to manage it then they may earn more than that.
Shareholders’ equity (or capital)
The final section of the balance sheet is shareholders’ equity. This section typically includes several items, including:
dividends reinvested; and
total gains or losses from all sources.
Paid-in capital is the value of a company’s common stock at the time of incorporation. Investment income typically includes any earnings from the company’s assets. Dividends reinvested are any dividends that were paid to shareholders and then used to buy more stock in the company. Total gains or losses from all sources include any increases or decreases in the value of assets and liabilities on the balance sheet. All of these items are added together to get shareholders’ equity on the balance sheet.
Shareholders’ equity (or capital) breakdown
Another important section included in a statement of financial position is the shareholders’ equity (or capital) breakdown.
This section breaks down the assets and liabilities of the company into subcategories. These subcategories are:
• Paid-in capital – This is the value of common stock that the corporation has issued, including shares that have been issued for cash, goods, or services.
• Retained earnings – This is the cumulative net earnings of the corporation from its inception until the end of the reporting period, minus dividends paid to stockholders. It also includes any amounts that were reinvested in the company for future growth.
• Treasury stock – This is common stock owned by the corporation that was purchased from either former employees or shareholders at a reduced price. It is recorded at its purchase price and amortized over its life span based on how much it decreases in value. It cannot be sold unless there is outside approval.
Current debt obligations
The next part to figure out is the current debt obligations. This is pretty simple, all you have to do is look at the current liabilities on the balance sheet.
If the company has a lot of debt, then it is important to know how much they will have to pay each year in interest. If you do not know this, then you cannot fully evaluate the company.
A higher interest rate means a higher cost, which means less money going towards other things within the company. A lower interest rate means less of a cost, which could help with production costs and could bring in more customers.
This is an important part of evaluating a company and why there are professional accountants that specialize in this area. They check to see if the company has enough assets to cover their liabilities.
Long-term debt obligations
The next item to examine is long-term debt obligations. This includes mortgages, loans, and bonds. Companies should report the estimated cost of these obligations in a manner consistent with financial statements guidelines.
If the company does not have any long-term debt obligations, then the number entered on the statement of cash flows should be zero. If there are any outstanding debts, then they should be accounted for on the statement of cash flows as well.
Remember, statements of cash flows are organized by source of cash (income) and use of cash (expenditure) transactions. These must be clearly identified and separated so that they can be properly analyzed.
Analysts and investors often look at the changes in operating cash flow and capital expenditure spending to determine whether a company is investing in itself and growing appropriately.