17  Financial Statements for a Lender

Learning Objectives

After completing this chapter, you will be able to:

1. Prepare comparative financial statements, including the statements of changes in equity and of cash flows, from trial balances taken at successive year-ends, treating closing entries, opening balances, and postings after the year-end correctly.
2. Rebuild a liability from the documents behind it, and use subledger evidence to find the year-end adjustments for accruals, cutoff, and interest.
3. Assign each adjustment to the period it belongs to by distinguishing errors from changes in estimate, and judge materiality individually and in aggregate to decide what to record, what to pass, and how to present the prior year.
4. Build note disclosures from the database, for revenue, inventories, property and equipment, debt, accrued liabilities, and subsequent events, and reconcile each to the statements.
5. Separate what the records can settle from what needs evidence outside the database, such as the company’s tax status and its leases, and assess liquidity and going-concern conditions as a lender would.
6. Choose Excel, SQL, or Power BI for each part of a reporting task, and document the work so that a reviewer can rerun and trace every number.

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Opening Scenario

It is July 2027. In June the controller showed the audit committee where fiscal 2026’s cash had gone: into inventories, materials above all, while growing payables and sales tax with no recorded remittance held the cash balance up. The CFO has since applied to the company’s bank for a revolving line of credit to carry the working capital until the materials are used. The bank’s relationship manager has replied with what its credit committee needs before it can consider the request: complete financial statements for fiscal 2026, prepared under U.S. generally accepted accounting principles (GAAP), with fiscal 2025 for comparison and full notes. The credit committee meets in mid-August, so the package is due at the end of July.

Charles River has never given financial statements to a lender. Its shareholders received statements for fiscal 2025 that were prepared straight from the ledger, and no adjustment has been recorded since, so the ledger is the one you have worked with since Part I. The controller asks you, the staff accountant of Chapters 13 to 15, to prepare the package and a memo to the CFO on what the package required and what remains open. What you prepare is a draft for the CFO’s review: it goes to the bank only once the matters that the records cannot settle have been settled.

This chapter is a case, and it has no tutorials. Each requirement states what the controller needs and names the earlier chapters it draws on, and you decide how to produce it with the tools and techniques of the earlier Parts. Some steps are work for a query, some for a workbook, and some for a report. Where the choice is clear, the requirement says why; where it is not, part of the task is to choose and to explain your choice in your documentation.

17.1 The Situation

The bank asks for four statements and their notes: balance sheets at December 31, 2026 and 2025, statements of income, statements of changes in stockholders’ equity, and statements of cash flows for the two fiscal years. The statements will be management’s own, prepared by the company, but the relationship manager adds that the bank may ask for a review or an audit by an outside accountant before it sets final terms. Every number in the package must therefore be traceable to the records that support it. The case treats Charles River as a private company that is not a public business entity and files nothing with the Securities and Exchange Commission (SEC). That status decides which disclosure relief its notes may use and the date through which later events are evaluated.

The controller has set out what she needs to know before the package goes to the CFO:

• what the ledger says as it stands, and what it takes to turn that into GAAP statements for both years;
• which adjustments the records support, which year each belongs to, and whether they matter;
• what the notes must say, with each note tied to the statements;
• what the data cannot settle, which goes to the CFO before the package leaves the company.

She adds four conditions. First, nothing is posted to the ledger: every adjustment lives in the workbook as a numbered entry with its evidence, the query and the document numbers behind it, so that the CFO can approve it before anyone posts it. Second, materiality starts from a benchmark of 5% of income before income taxes for the year in question, as the ledger records it, and every adjustment is listed, however small. Third, findings are worded as what the records show, not as what anyone did. Fourth, the package states the date through which its data run.

Her outline of the package is in Table 17.1, with the topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) that governs each component. Its last row holds matters that the ledger does not record and the package must still address; part of Requirement 2 is to find what else the ledger leaves out.

Table 17.1: The controller’s outline of the package

Component	What it shows	Guidance	Requirements
Balance sheets	Financial position at both year-ends, current items apart	Topic 210	1, 5, 6
Statements of income	Revenue, costs, and income for both years	Topic 225	1, 5, 6
Changes in equity	Stock and retained earnings, with corrections	Topic 505	5, 6
Cash flows	Operating, investing, and financing activities	Topic 230	6
Policies and corrections	Accounting policies; correction of prior-year amounts	Topics 235, 250	5, 7
Revenue	Revenue disaggregated; contract balances	Topic 606	4, 7
Inventories	Components and basis	Topic 330	7
Property and equipment	Cost, depreciation, additions, disposals	Topic 360	7
Notes payable	Terms, maturities, current portion	Topic 470	4, 5, 7
Accrued liabilities	Components	—	3, 4, 7
Later events and risks	Subsequent events, contingencies, going concern	Topics 855, 450, 205-40	8, 9
Matters the ledger does not record	Income taxes, leases, credit losses	Topics 740, 842, 326	5, 9

TipIn Practice

Lenders use financial statements to monitor borrowers as well as to decide whether to lend. In a study of small commercial loans, banks requested financial statements to monitor about half of the loans after making them, more or less often depending on the borrower’s credit risk, the length of the relationship, the collateral, and whether the borrower provided business tax returns (Minnis & Sutherland, 2017). The quality of the statements matters too. In a large sample of private U.S. firms, those with audited statements paid less for their debt, and lenders placed more weight on audited figures when they set the rate (Minnis, 2011). A working-capital line is often limited to a share of the borrower’s eligible receivables and inventories, which is one reason a lender asks for their detail.

17.2 The Data You Will Use

The case builds on what the chapters taught. Chapter 6 built the mapping from accounts to statement lines, and Exercise 11.1 wrote the same statements in SQL. Chapter 12’s audit query library, Audit.sql, holds tests of cutoff at the year-end. Tutorial 14.3 built a ledger model in Power BI, and Chapter 15 drilled through from a statement line to its postings. If you completed the Part III and Part IV comprehensive cases, their files give you a head start on the payroll accrual and on a ledger model, but this case does not require them.

The case also draws on tables that the chapters used little or not at all: DebtAgreement and DebtScheduleLine for the notes payable, FixedAsset and FixedAssetEvent for property and equipment, the AccrualJournalEntryID of PurchaseInvoiceLine and the ReversesJournalEntryID of JournalEntry for accrued expenses, ServiceEngagement, ServiceTimeEntry, and ServiceBillingLine for the design services, and SalesReturn, SalesReturnLine, CreditMemo, and CustomerRefund for returns and customer credits. Profile each before you rely on it, as Chapter 10 profiled WorkOrder.

You will keep three files of your own, listed in Table 17.2. Each tool hands its results to the next in the ways the book has taught: Copy with Headers or Export to CSV from DB Browser, and Power Query in both Excel and Power BI.

Table 17.2: Tools and files

Tool	File	Holds	Hand-off
SQL	LenderPackage.sql, run on CharlesRiver_Capstone.sqlite	Trial balances, open accruals, cutoff populations, note schedules	Copy with Headers or Export to CSV
Excel	Charles River Lender Package.xlsx	Documentation, trial balances, adjustments, statements, notes	A Table of adjustment lines
Power BI	Charles River Lender Review.pbix, a ledger model of your own	Review of balances and changes, drill-through, tests of the package	Reads CharlesRiver.xlsx and the package workbook

WarningWatch out

Every balance in this case is taken as of a date, and each kind of posting needs its own rule. A trial balance leaves out only the closing entries dated on its own as-of date: the closes of earlier years have already moved their income into retained earnings, so they stay in. The opening entry of January 1, 2024, is a 2024 posting. Supplier payments are the only postings after fiscal 2026, so a balance taken at the ledger’s last date is not a year-end balance. Revenue belongs to the year of delivery, not the year of the invoice. And supplier invoices post on the day they were received and approved, not on their invoice date.

WarningWatch out

The ledger and its documents do not always measure the same thing. A supplier invoice clears an accrual only up to the amount accrued: any excess goes to expense, and a residual can be cleared later by a separate entry. So measure what cleared each accrual from the ledger’s postings, not from invoice totals. Several of the new tables fan out when joined to their headers, as Chapter 10 warned. And do not net an opening balance against a new estimate: a balance that has sat unchanged since the opening entry is a question about the opening entry, not part of this year’s accrual.

17.3 Getting Started

Set up your files before you begin. Make a working copy of the downloaded CharlesRiver.sqlite named CharlesRiver_Capstone.sqlite, and open the copy in DB Browser for SQLite, so that the download is never changed and the CharlesRiver_Work.sqlite of Part III keeps its views. Start LenderPackage.sql with a header comment that states its purpose, the database file, the preparer and the date, and the checks it performs, and write two comment lines above every query: what it tests, and its population and expected result. Create Charles River Lender Package.xlsx with a Documentation worksheet that states the purpose, the sources, and the date through which the data run, and create Charles River Lender Review.pbix. You need DB Browser for SQLite, Excel for Microsoft 365, and Power BI Desktop, which runs only on Windows; if you work on a Mac, plan to use a Windows computer for Requirements 2 and 6.

The case is long, so work in four milestones, one for each phase of the requirements. Your instructor may ask you to hand in each milestone and may then release checkpoint values, so that an early error does not carry through the rest of the case.

1. The ledger as it stands (Requirements 1 and 2): the three trial balances, the recorded statements, and the Questions table.
2. The adjustments (Requirements 3 to 5): the rebuilt accrued expenses, the cutoff measurements, and the schedule of adjustments with its evidence and its materiality judgment.
3. The statements and notes (Requirements 6 and 7): the adjusted statements, the required notes, and the tests in the Review file.
4. What the data cannot settle (Requirements 8 and 9): the review of later events and the memo to the CFO.

17.4 Requirements

The requirements fall into four phases: the ledger as it stands, the adjustments, the statements and notes, and what the data cannot settle. Work through them in order, because each phase uses what the one before it found.

17.4.1 Phase 1: The Ledger as It Stands

Requirement 1: Build the trial balances and the recorded statements (Chapters 6, 10, and 11).

Three trial balances that differ only in their date are one query, rerun with a parameter, as Chapter 11’s Params CTE showed. Mapping accounts to statement lines and laying out the statements are workbook work, as in Chapter 6, and the workbook is where the adjustments will go.

• In LenderPackage.sql, write one trial-balance query whose as-of date sits in a Params CTE and that leaves out only the closing entries dated on that date. Run it for December 31, 2024, 2025, and 2026.
• Copy each result into its own worksheet of the package workbook, map the accounts to statement lines by AccountSubType and account number, and build the recorded balance sheets and statements of income. Validate them against control totals you can trace: Chapter 6’s pre-closing trial balance at the end of fiscal 2026 and its net income.
• List the accounts that have never been posted with an anti-join (Chapter 10), and note any account that a company like Charles River would need and the chart does not have.

Requirement 2: Review the recorded statements before adjusting them (Chapters 14 and 15).

A review that moves from a statement line down to the entries behind it is quickest in a report with a ledger model and drill-through. Build Charles River Lender Review.pbix from CharlesRiver.xlsx as Tutorial 14.3 built its ledger star, with the closing entries flagged, and write a Balance measure that adds debits less credits up to a date and leaves out only the closing entries dated on that date. Turn off Auto date/time and Autodetect new relationships after data is loaded under Current File, as Tutorial 13.1 did, so that Power BI does not add hidden date tables or relationships you did not choose.

• Build a matrix of statement lines and accounts with each year-end balance and the change from 2025 to 2026, and flag the changes above a threshold that a what-if parameter sets at the controller’s materiality, as in Exercise 15.4.
• Drill through from the flagged lines to their postings. With a matrix of balances by account and SourceDocumentType, find the balances that rest on journal entries alone and those that have not moved since the opening entry.
• Record each question the review raises in a Questions table entered with Enter data, as Chapter 16 kept its dispositions, with the requirement that will answer it.

17.4.2 Phase 2: The Adjustments

Requirement 3: Rebuild Accrued Expenses at each year-end (Chapters 3, 10, and 12).

Account 2040 Accrued Expenses has grown every year. Apart from its opening line, five kinds of posting reach it, as Figure 17.1 shows. Month-end accrual entries credit it for services received and not yet billed. A supplier invoice that refers to an accrual debits it, up to the amount accrued, and an Accrual Adjustment entry clears all or part of what remains. Shipments credit it for the freight they will cost, and a monthly settlement entry pays the carriers. Splitting the balance into these parts at three dates joins four tables under conditions on dates, the work Chapters 10 and 12 did in SQL.

• Split 2040 at each year-end into the opening line, the freight accrued on shipments and not yet settled, and the service accruals not yet cleared, and reconcile the parts to the ledger at all three dates.
• For each accrual entry, subtract what had cleared it by each date: the invoice postings to 2040 for the invoice lines that refer to it, and the Accrual Adjustment entries that reverse it.
• Measure how long invoices took to clear the accruals, and age the open accruals at each year-end against the longest wait you observe.
• Decide which of the old accruals you treat as still owed and which you would reverse, and in which period. Age shows that an accrual has gone unbilled, not that nothing is owed. The longest wait selects the items to investigate, and the period of any reversal depends on what the facts were at each year-end and when they became known. So state the assumption your decision rests on and the evidence that would confirm it, such as the suppliers’ statements and the service contracts.

Figure 17.1: How an accrued expense is recorded and cleared.

Requirement 4: Test cutoff at each year-end (Chapters 6 and 12).

Chapter 12 tested revenue and payroll cutoff, and Exercise 12.1 measured it at each year-end. The statements need those measurements as entries with their accounts, made by one method at every year-end they present and at the one before, because an error at the end of 2024 reverses in 2025. Queries find the populations; prorating a pay period or an interest payment is a formula that a reviewer should be able to see, so it belongs in the workbook.

• Revenue: at the end of 2024, 2025, and 2026, find the invoices whose revenue was posted in a different year from the delivery of the goods they bill, and the shipments never invoiced, as tests L5 and L6 of Audit.sql do. Recognize revenue in the year of delivery, when this case assumes that control of the goods passes, and value the unbilled shipments at their order price less discount.
• Payroll: measure the cost of the work done in the last days of each December and paid in the next year, with one working-day method (test L7 of Audit.sql lists the pay periods that cross each year-end, and test L8 shows that 2030 accrued none of them). For 2024 and 2025, take the registers of those pay periods, prorated by the working days in WorkCenterCalendar. For 2026, whose last pay periods have no registers, multiply the cost per working day of the last eight processed pay periods by the working days left in the year. Split manufacturing from the other cost centers, and explain where each part ends up.
• Interest: from DebtScheduleLine, measure the interest that each note had accrued between its last payment and each year-end, and state your day-count convention.

Requirement 5: Classify, measure, and judge the adjustments (Chapters 4, 6, and 8).

A working trial balance, with the recorded balances, the adjustments, and the adjusted balances side by side, is the accountant’s standard form, and in a workbook every adjustment stays traceable to its evidence. Table 17.3 lays out the schedule of adjustments.

• Number each adjustment and write its entries for the trial balances at December 31, 2025 and 2026, with the accounts and the queries or document numbers that support it. Keep the entry lines in an Excel Table, one row per account, so that the Review file can load them.
• Classify each as the correction of an error, a change in estimate, or a reclassification, and assign it to a period. Figure 17.2 shows how a cutoff item missed at each year-end, and recorded in the next year, moves across the periods presented; a balance that does not reverse needs an analysis of its own.
• Compute the controller’s materiality for each year, and decide what to record and what to pass, individually and in aggregate. Consider also an allowance for credit losses at the rates of Exercise 8.1 (0.5%, 2%, 5%, 15%, and 40% of the balances current, 1 to 30, 31 to 60, 61 to 90, and more than 90 days past due), the returns expected after the year-end on the year’s deliveries, and the condition of returned goods put back into stock at full cost.
• Show that every adjusted trial balance balances and that no adjustment touches cash. Decide how the 2025 column and the statement of changes in equity present the corrections, under the guidance on accounting changes and error corrections (ASC Topic 250).

Table 17.3: Layout of the schedule of adjustments

Column	What it holds
No.	A number for each recorded adjustment, reclassification, or passed item
Adjustment	What the entry corrects or estimates, in a few words
Accounts	The accounts debited and credited
Evidence	The query in LenderPackage.sql and the document or entry numbers
Retained earnings, January 1, 2025	The effect on opening equity
Income 2025 and 2026	The effect on each year’s income before income taxes
Balance 2025 and 2026	The effect on the balance sheet at each year-end
Type	Error, change in estimate, or reclassification
Decision	Recorded, passed, or held for evidence, and why

Figure 17.2: How a year-end cutoff adjustment moves across the periods presented.

WarningWatch out

An estimate that later proves wrong is not an error. If the facts available at the year-end supported the estimate, the difference belongs to the period in which it becomes known; if the facts were there and were missed, the correction belongs to the period in which they existed. Materiality is not only a number either. Companies that found the same lease accounting error decided how to correct it on qualitative considerations, and on what other companies had done, as well as on its size (Acito et al., 2009); the decision is a judgment, and what others did is evidence of practice, not a ground for it. Errors judged immaterial have been followed by more errors and weaker controls (Choudhary et al., 2021). An error that recurs every year deserves attention even when each year’s effect is small. Finally, none of this case’s adjustments moves cash, so they change lines of the cash-flow reconciliation but not its totals; an entry that moved cash, or an amount moved from one activity to another, would change them.

17.4.3 Phase 3: The Statements and Notes

Requirement 6: Prepare the statements (Chapter 6).

The statements come from the adjusted trial balances in the workbook, and the Review file tests them against the ledger. A statement of changes in equity carries each component of equity from its opening balance to its closing one; when an error of an earlier year is corrected, the opening retained earnings are adjusted and the earlier year’s columns are labeled as restated (ASC Topic 250).

• Prepare classified balance sheets at both year-ends, and statements of income by function with a line for income before income taxes.
• Prepare a statement of changes in stockholders’ equity from January 1, 2025, that shows the correction of the opening balance.
• Prepare statements of cash flows by the indirect method: start from net income, add back depreciation and the loss on disposals, adjust for the change in each working-capital balance, and classify the rest as investing or financing. Find the entries that moved no cash, such as equipment financed by a note and a disposal with no proceeds, and disclose them instead of reporting them as cash flows. Show that the adjustments, none of which moves cash, change only the lines of the reconciliation, not its totals. Add the supplemental information: interest paid, income taxes paid, and investing and financing activities that involved no cash.
• In the Review file, load the adjustment lines from the package workbook beside the ledger, and add tests to its Tests tab: each entry balances, no entry touches cash, adjusted net income agrees with the workbook, and recorded total assets agree with your trial balances of Requirement 1.

Requirement 7: Build the note schedules from the records (Chapters 6, 10, 11, and 14).

The notes this requirement asks for rest on schedules that the records can produce, and each schedule must agree with the statements. Rebuilding a property register, a debt schedule, or revenue by product line joins documents to the ledger, which suits SQL, and the workbook formats the schedules beside the statements they support. The sales model of Chapter 14 could give the revenue disaggregation instead, but it would then have to be reconciled to the ledger and to the cutoff adjustment, so choose, and say why.

• Property and equipment: roll cost and accumulated depreciation forward by class from FixedAsset and FixedAssetEvent, reconcile the roll-forward to the ledger, and state the method and the lives.
• Notes payable: the terms of each note, the asset the records link it to, the principal due in each of the next five years, the current portion, and the interest paid.
• Revenue: disaggregate revenue on the adjusted basis by product line, customer segment, and timing of transfer, and show the contract balances that ASC Topic 606 requires: receivables, contract assets, and contract liabilities. For the timing, the case assumes that the design work creates no asset with an alternative use to Charles River and that the contracts give Charles River an enforceable right to payment for the work completed to date, so the revenue is recognized over time. The contracts would confirm both before release. Test whether any recorded service work was not billed at a year-end.
• Accrued liabilities by component, and inventories by component and basis.
• Write the text of the notes on property and equipment, notes payable, revenue, and accrued liabilities, and of the note on the correction of the 2025 statements. A package that can go to the bank also needs the notes on accounting policies and inventories, and on the matters of Requirement 9 such as income taxes and leases: draft them if your instructor asks, and list in the memo those still to be written.

17.4.4 Phase 4: What the Data Cannot Settle

Requirement 8: Look past the balance-sheet date and at the year ahead (Chapters 8 and 12).

The statements must account for what happened after December 31, 2026, up to the date they are available to be issued (ASC Topic 855), and management must evaluate whether conditions raise substantial doubt about the company’s ability to continue as a going concern for a year after that date (ASC Subtopic 205-40). The database can contribute to both, but it cannot complete either.

• Profile the records dated after fiscal 2026, compare them with the same weeks of 2026, and state what they contain and what they cannot contain.
• Search them for liabilities missing at the year-end: payments in 2027 for goods or services received in 2026 and not recorded as payables, Chapter 12’s unrecorded liabilities.
• List the events the CFO must evaluate up to the date the statements are available to be issued.
• Measure the conditions that a going-concern evaluation weighs, and the factors that mitigate them, from the adjusted statements, and state what the CFO’s evaluation needs beyond the database.

Requirement 9: Assemble the package and write the memo to the CFO (Chapter 8).

Assemble the statements and notes as a PDF produced from the workbook, and write a memorandum of no more than two pages to the CFO, with an appendix of exhibits of no more than three pages. For each matter that the records cannot settle, state what the records show, the evidence that would settle it, its possible effect where the ledger allows you to measure it, and the treatment you propose. The memo must cover the company’s tax status, its leases, the sales tax payable with no remittance recorded, and the balances that no document supports; it may also raise other matters the records point to, such as whether standard costs unchanged for three years still measure the finished goods at cost. Add the passed adjustments for the CFO’s approval, the changes to the year-end close that would prevent this year’s adjustments from recurring, and your recommendation on whether the package should go to the bank as it stands.

17.5 Deliverables and Checklist

Before you submit, check that you have each of these:

1. LenderPackage.sql, with its header complete and two comment lines above every query.
2. Charles River Lender Package.xlsx, with the Documentation worksheet and the date through which the data run; the three trial balances; the schedule of adjustments with its evidence; the adjusted trial balances; the statements; and the required notes.
3. The draft package for the bank: a PDF of the statements and the required notes, produced from the workbook.
4. Charles River Lender Review.pbix, with its Questions table and its Tests tab.
5. The memorandum to the CFO, of no more than two pages, with an appendix of exhibits of no more than three pages.

17.6 What a Strong Submission Includes

• Trial balances that anyone can rerun from one query and that agree with control totals already trusted.
• Every adjustment numbered, supported by a query or a document, assigned to a period, and classified, with the line between an error and an estimate drawn and explained, and the assumption stated wherever the records cannot prove it.
• Materiality judged in aggregate and on qualitative grounds as well as by size, with the passed items listed for approval.
• Statements that agree with one another, with cash unchanged by adjustments that move no cash, and the totals of each cash-flow activity unchanged as long as no adjustment changes how a cash flow is classified.
• Notes reconciled to the statements, each built from records that a reviewer can trace.
• A memo that measures only what the ledger supports, describes rather than accuses, and ends with a recommendation the CFO can act on.

NoteConnecting the Dots

This case reused work from across the book: the trial balance and statement mapping of Chapter 6, the anti-join of Chapter 10, the Params CTE of Chapter 11 and the statements of Exercise 11.1, the cutoff tests of Chapter 12, and the ledger model and drill-through of Chapters 14 and 15. Few of its techniques were new. What was new was deciding which tool each step needed and keeping the evidence of every step where the next reader could find it.

17.7 Looking Ahead

This case turned a ledger into a traceable draft of the statements a lender asked for, and found along the way what a ledger alone cannot support: the evidence and the decisions needed before a lender can rely on them. Most of the work was descriptive and diagnostic analytics, in the terms of Table 1.1: the statements and the notes describe the company, and the rebuilt accruals, the cutoff tests, and the review of the opening balances diagnose where the ledger and its documents part. The estimates were small predictive models, of the payroll owed at a cost per working day, of the accruals that invoices would clear, and of the returns still to come. The recommendations to the CFO, on what to record, what to pass, and what to settle before the package leaves, are prescriptive.

Work like this rarely ends when the package leaves. A lender reads the statements and the notes, asks questions, and comes back at the intervals the loan agreement sets to test its terms, and an outside accountant, if the bank asks for one, starts from the same trial balances and adjustments. The reconciliations and the documentation you built are what make those conversations short, and the matters you raised for the CFO are the ones that will decide whether the package can be relied on.

17.8 Further Reading

Acito, A. A., Burks, J. J., & Johnson, W. B. (2009). Materiality decisions and the correction of accounting errors. The Accounting Review, 84(3), 659–688. https://doi.org/10.2308/accr.2009.84.3.659 A study of how more than 250 U.S. companies corrected the same operating lease accounting error between 2004 and 2006, either by restating their prior statements or by a less visible catch-up adjustment in the current period. Quantitative and qualitative materiality considerations explained much of the choice, but so did what other companies had done, which shows how much judgment goes into deciding how to present a correction.

Allee, K. D., & Yohn, T. L. (2009). The demand for financial statements in an unregulated environment: An examination of the production and use of financial statements by privately held small businesses. The Accounting Review, 84(1), 1–25. https://doi.org/10.2308/accr.2009.84.1.1 A study of small private businesses that are not subject to the reporting rules of the U.S. Securities and Exchange Commission (SEC): which of them prepare statements, which have them compiled, reviewed, or audited, and which use the accrual basis. Firms with audited statements had greater access to credit, and firms with accrual-based statements a lower cost of credit, findings that help explain why lenders value the financial statements of a company like Charles River.

Choudhary, P., Merkley, K. J., & Schipper, K. (2021). Immaterial error corrections and financial reporting reliability. Contemporary Accounting Research, 38(4), 2423–2460. https://doi.org/10.1111/1911-3846.12713 Large-sample evidence on the correction of errors that companies judged immaterial to the previously issued statements that contained them. Such corrections became more common after about 2004, and they foreshadowed later errors, material weaknesses in internal control, and comment letters from the SEC. The paper is useful when you decide whether a small error that recurs every year deserves attention.

Hennes, K. M., Leone, A. J., & Miller, B. P. (2008). The importance of distinguishing errors from irregularities in restatement research: The case of restatements and CEO/CFO turnover. The Accounting Review, 83(6), 1487–1519. https://doi.org/10.2308/accr.2008.83.6.1487 The authors separate restatements that correct unintentional errors from those that correct intentional misstatements, which they call irregularities, and show that the two have very different consequences for companies and their executives. The distinction supports this case’s practice of reporting what the records show without assuming intent.

Minnis, M. (2011). The value of financial statement verification in debt financing: Evidence from private U.S. firms. Journal of Accounting Research, 49(2), 457–506. https://doi.org/10.1111/j.1475-679X.2011.00411.x Using a large proprietary database of private U.S. firms, the study finds that audited firms have a significantly lower cost of debt, that lenders place more weight on audited figures when they set the interest rate, and that accruals from audited statements predict future cash flows better. It helps explain why a lender may value an audit when it sets the terms of a loan.

Minnis, M., & Sutherland, A. (2017). Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research, 55(1), 197–233. https://doi.org/10.1111/1475-679X.12127 Drawing on records of banks’ requests for information from small commercial borrowers, the authors study when banks use financial statements to monitor a loan after making it. Banks requested statements for about half of the loans, more or less often depending on the borrower’s credit risk, the length of the relationship, the collateral, and whether the borrower provided tax returns. A lender’s interest in the statements continues long after the loan is made.

Tan, C. E. L., & Young, S. M. (2015). An analysis of “little r” restatements. Accounting Horizons, 29(3), 667–693. https://doi.org/10.2308/acch-51104 The paper documents “little r” restatements, in which a company corrects immaterial errors that have accumulated to a material amount by revising the prior-year figures in its current statements, without reissuing the earlier statements. Most of the companies that did so in 2009 to 2012 gave readers no explanation of why the errors occurred, a point to weigh when you write the note on the correction of the 2025 statements.

17.9 References

Acito, A. A., Burks, J. J., & Johnson, W. B. (2009). Materiality decisions and the correction of accounting errors. The Accounting Review, 84(3), 659–688. https://doi.org/10.2308/accr.2009.84.3.659

Choudhary, P., Merkley, K. J., & Schipper, K. (2021). Immaterial error corrections and financial reporting reliability. Contemporary Accounting Research, 38(4), 2423–2460. https://doi.org/10.1111/1911-3846.12713

Minnis, M. (2011). The value of financial statement verification in debt financing: Evidence from private U.S. firms. Journal of Accounting Research, 49(2), 457–506. https://doi.org/10.1111/j.1475-679X.2011.00411.x

Minnis, M., & Sutherland, A. (2017). Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research, 55(1), 197–233. https://doi.org/10.1111/1475-679X.12127