Financial Statements: A Requirement for Contract Surety Bond Eligibility

Financial statements are essential for a company's success, ability to withstand economic changes, and future growth. 

FREMONT, CA: A surety bond guarantees that a contractual obligation will be fulfilled, particularly in the construction industry. A basic financial statement consists of the balance sheet, income statement, and notes to the financial statement.

The balance sheet represents a company's finances at a specific time, comparing it with previous periods and other businesses in the same industry. It summarizes a company's assets, liabilities, and shareholders' equity. Assets are listed in order of liquidity, divided into current and non-current or long-term investments. Liabilities include bills, debt, and taxes owed to outside parties. 

Shareholders' equity is the money attributable to a business's owners, also known as "net assets." It comprises retained earnings, capital surplus, and shareholders loans that will not be repaid within a specified period. Retained earnings are the portion of a company's net earnings that it keeps and reinvests in the business instead of distributing them as dividends to shareholders. At the same time, capital surplus represents the amount shareholders have invested more than common stock or preferred stock accounts to help capitalize a company needing cash.

To treat these obligations as equity for bonding purposes, shareholders may promise not to take back the loans they have made to the company. Knowing the fundamentals of financial statements is essential to assessing a business's financial position and determining whether bonding is necessary.

An income statement is a financial report that outlines a company's financial performance over a specific accounting period. It summarizes revenues and expenses incurred through operating and non-operating activities and net profit or loss. The income statement has two sections: operating and non-operating.

Notes to the financial statement offer information about the accounts listed in the balance sheet and income statement. They help break down inventory and asset categories, outline depreciation, and clarify debt repayment terms. They may also provide additional details about items used as references, applicable policies, required disclosures, or adjustments to certain values.

Financial statements must be prepared through a review engagement by a chartered professional accountant for bonding eligibility. The creation of various kinds of financial statements is the responsibility of these accountants.

Audit: The CPA Audit is the declaration with the most complete verification. The goal of an audit engagement is to assure not-for-profit organizations that the financial statements comply with Canadian accounting standards and do not include any major misstatements. Auditors employ diverse techniques to ascertain whether the financial statements are devoid of substantial misstatements.

Review Engagement: The review engagement aims to ascertain whether the financial statements are believable or plausible. This type of assurance is known as negative assurance, meaning the professional accountant only assures that nothing has come to their attention that Canadian accounting standards for not-for-profit organizations do not present the financial information.