Tax returns and compiled financial statements give a financial breakdown of a business for investors, lenders and shareholders. Despite containing similar information, these two methods of financial reporting feature different information and uses. To analyze financial data, a business owner must understand what type of information is being presented.

Tax Return Components Businesses and individuals use tax returns to report information to the IRS. Included on the return are income, expenses, deductions, credits, exemptions and the calculation of tax due to the federal government. The tax return provides a snapshot of money coming in and going out of a business for a specific calendar year. The method of accounting for tax returns follows either a cash basis or accrual basis. Under the cash basis, the income is recognized as it comes in while expenses are recognized when they are paid. Accrual basis considers expenses when they incur, not when they are paid.

Compiled Financial Statements A compiled financial statement provides the financial information of a company or individual, including income, expenses, cash flow, assets and liabilities. A financial statement features an accrual basis of accounting. In most cases, the Generally Accepted Accounting Principles (GAAP) dictate the method of compiling information. However, the Journal of Accountancy reports that certain situations require the reporting of financial statements under the "other comprehensive basis of accounting," (OCBOA). Both methods provide a comprehensive look at the worth of a company, but the OCBOA method usually takes less time and cost to prepare.

Differences Tax returns operate on a calendar year spanning from Jan. 1 to Dec. 31 of the given year. Financial statements use the fiscal year indicated by the company. There are no universal dates establishing when a fiscal year begins and ends. It is at the discretion of the company. The rules regulating the reporting of information for the year are unique to each type of financial report. Linda Keith, a Washington CPA, points out that businesses often write off up to $108,000 worth of equipment using a depreciation in the year of purchase. Financial statements produced under GAAP do not give an initial depreciation and write off the cost over the useful life of the equipment.

Similarities Both tax returns and compiled financial statements use information provided by the business or individual. The CPA is not held responsible for the information found in either report. The IRS considers the taxpayer responsible for ensuring that all information is reported correctly. The CPA is not required to audit or verify any information when compiling a financial statement. This often benefits the company unable to afford an audit, review or appraisal. Cynthia A. Cox, a Texas CPA, reports that because of the lack of oversight, lenders or third parties may not accept compiled financial statements.

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