What it means
The alternative is a special purpose statement, prepared under a particular framework for a named user, such as accounts drawn up on a tax basis for a revenue authority or a covenant schedule for one bank. Those are useful but narrow, and they are not meant to circulate beyond the reader they were written for.
An all-purpose set typically contains four statements plus notes: the balance sheet, the income statement, the statement of changes in equity and the cash flow statement. The notes are where most of the real information sits, covering accounting policies, breakdowns of large balances and commitments that never appear on the face of the statements.
The design compromise is genuine. A lender mainly wants to know about liquidity and security over assets while an equity investor wants growth and margins, so the general purpose set gives each of them the raw material to work out what they need rather than the answer itself.
That is why the statements are prepared under a recognised framework such as IFRS or US GAAP and, for larger entities, independently audited. Comparability and assurance are what make a single document credible to readers who cannot simply telephone management and ask for more detail.
The term is also a reminder of what these statements are not. They are backward-looking, prepared at a point in time, and silent on many things a decision-maker cares about, so they are a starting point for analysis rather than the whole of it.
In practice
Real-world examples.
Example
A manufacturer sends the same audited annual accounts to its bank, its insurance broker and its largest customer's procurement team. Each reads a different part, but the company only prepares and audits one document.
Example
A charity publishes general purpose financial statements so donors, its regulator and its grant funders can all assess how money was spent. When one funder asks for a project-specific schedule, the finance director prepares that separately as a special purpose report.
Example
A private company applying for a $3,000,000 facility hands its lender the all-purpose statements. The lender uses them for the covenant tests but also asks for a monthly management pack, because the annual accounts alone are too infrequent for monitoring.
Formula
Calculation
There is no single formula, because the test of an all-purpose set is whether several different users can each derive what they need from the same document.
Ardenmill Tools publishes one set of accounts showing revenue of $15,000,000, net income of $1,200,000, current assets of $4,800,000, current liabilities of $2,000,000 and shareholders equity of $8,000,000. The bank checks the current ratio: $4,800,000 / $2,000,000 = 2.4, comfortably above its covenant minimum of 1.5. A supplier deciding on credit terms looks at net margin: $1,200,000 / $15,000,000 = 8.0%. An equity investor computes return on equity: $1,200,000 / $8,000,000 = 15.0%. Three users asked three different questions and none of them needed a special report, which is exactly what the all-purpose statement is designed to achieve.Case study
Seen in the real world.
The following is an illustrative and fictional example. Fenwold Interiors had grown to $22,000,000 of revenue while producing only tax-basis accounts, which suited its accountant and its tax return but nothing else. When the founders approached three banks for a $5,000,000 expansion facility, two declined to proceed without general purpose statements.
The company spent about $60,000 and four months converting to a recognised framework and completing a first audit. The conversion changed almost nothing about the business but changed several reported numbers, because leases came onto the balance sheet and revenue on long installation contracts was recognised over time rather than on invoice.
Reported equity fell by $1,400,000 under the new basis, yet the facility was approved at a rate 0.6 percentage points below the original indication. The illustrative point is that lenders were not paying for better results, they were paying for statements they could compare with everyone else's.
Watch out
Common mistakes.
- Assuming any set of numbers produced by an accountant is a general purpose financial statement, when tax-basis or cash-basis accounts are special purpose reports with a limited audience.
- Reading only the four primary statements and skipping the notes, which is where contingent liabilities, related party dealings and accounting policy choices are disclosed.
- Expecting the statements to answer a specific question directly, when their job is to supply comparable raw material from which each user calculates their own measures.
Questions
People also ask.
What is the difference between general purpose and all-purpose?
None in substance; general purpose financial statements is the wording used in the accounting standards, and all-purpose is the plainer everyday equivalent.
Do small private companies have to produce them?
It depends on the jurisdiction and size thresholds, but many small companies produce them voluntarily because banks, investors and large customers ask for them.
Are they always audited?
No, they can be audited, reviewed or simply compiled, and the assurance report at the front tells the reader which level of checking was performed.
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