An Example of Financial Statement Measurements Exhibits 3 and 4 show financial statements prepared for a hypothetical manufacturing company using GAAP, the modified cash basis, and the cash basis. Realistic dollar values are computed using published financial ratios for a manufacturer of sheet metal stampings. Financial statements of companies in many other industries likely would provide similar differences as reflected in the hypothetical company. Plant and equipment make up approximately fifty percent of the assets, and a capital lease exists. The largest liabilities are accounts payable and long-term debt.
Owners equity includes capital shock and retained earnings.
It is assumed that the hypothetical company is a small, non-public company. Exhibits 3 and 4 also show financial statements for the hypothetical company prepared on a modified cash basis and a cash basis. These statements use the same data as used for the GAAP statements, except that they have been adjusted to reflect the different bases. However, the combined effect of the differences causes net income to be approximately twenty-five percent of the GAAP net income. The statements probably would have to be accompanied by extensive disclosures in the notes to the financial statements, schedules of accounts receivable and accounts payable, lengthy interviews, and various other sources of information that may be requested by a bank lending officer before approval would be received for a loan.