Notes to the Financial Statements

Examples of Notes to the Financial Statements in the following topics:

• Financial Statement Notes

  • The goal of the financial statements is to convey the financial information about a company in an easy to understand format.
  • Including notes to the financial statement is not optional, it is a reporting requirement.
  • Notes to financial statements are added to the end of financial statements.
  • Notes can also explain the accounting methods used to prepare the statements.
  • Notes on the financial statements convey specific information about the line-items on the statement.

• Full-Disclosure Principle

  • The full disclosure principle states that information important enough to influence the decisions of an informed user of the financial statements should be disclosed.
  • Depending on its nature, companies should disclose this information either in the financial statements, in notes to the financial statements, or in supplemental statements.
  • Required disclosures may be made in (1) the body of the financial statements, (2) the notes to such statements, (3) special communications, and/or (4) the president's letter or other management reports in the annual report.
  • As an accountant, the full disclosure principle is important because the notes to the financial statements and other financial documents are subject to audit.
  • An opinion is said to be unqualified when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the financial statements.

• Uses of the Financial Statement

  • For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements and explanation of financial policies andmanagement discussion and analysis.
  • The notes typically describe each item on the balance sheet, income statement, and cash flow statement in further detail.
  • Notes to financial statements are considered an integral part of the financial statements.
  • A lending institution will examine the financial health of a person or organization and use the financial statement to decide whether or not to lend funds.
  • Vendors who extend credit may use financial statements to assess the creditworthiness of the business.

• Gain Contingencies

  • If the gain is probable and quantifiable, the gain is not accrued for financial reporting purposes, but it can be disclosed in the notes to financial statements.
  • If the gain is not probable or its amount cannot be reasonably estimated, but its effect could materially affect financial statements, a note disclosing the nature of the gain is also disclosed in the notes.
  • Thus, if a gain contingency, that remains unrealized, affects the economic decision of statement users, it should be disclosed in the notes.
  • A material gain contingency that is both probable and reasonably estimated can be disclosed in the notes to financial statements.
  • Explain how a company reports a gain contingency on their financial statements

• Preparing Financial Statements

  • When a business enterprise presents all the relevant financial information in a structured and easy to understand manner, it is called a financial statement.
  • The purpose of financial statements are to provide both business insiders and outsiders a concise, clear picture of the current financial status in the business.
  • The company may also provide Notes to the Financial Statements, which are disclosures regarding key details about the company's operations that may not be evident from the financial statements.
  • Once the company prepares its financial statements, it will contract an outside third party to audit it.
  • Explain the necessary steps to take before preparing the financial statements and the purpose of the statements

• An Expanded Equation

  • When a business enterprise presents all the relevant financial information in a structured and easy to understand manner, it is called a financial statement.
  • The purpose of financial statements are to provide both business insiders and outsiders a concise, clear picture of the current financial status in the business.
  • The company may also provide Notes to the Financial Statements, which are disclosures regarding key details about the company's operations that may not be evident from the financial statements.
  • Once the company prepares its financial statements, it will contract an outside third party to audit it.
  • The findings can state anything from the statements are accurate to statements are misleading.

• Outputs of Accounting

  • For large corporations, these statements are often complex and may include extensive notes, an explanation of financial policies, and management analysis.
  • The notes typically provide detail for items on the balance sheet, income statement, and cash flow statement.
  • Notes to financial statements are considered an integral part of the financial statements.
  • The objective of financial statements is to provide information about financial position, performance, and changes.
  • Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.

• Defining the Financial Statement

  • A financial statement is a formal report of the financial activities of a business, person, or other entity.
  • An income statement reports on a company's expenses and profits to show whether the company made or lost money.
  • For complex entities, financial statements often include an extensive set of notes as an explanation of financial policies.
  • The notes typically describe each item in detail.
  • For example, the notes may explain financial figures or the accounting methods used to prepare the statement.

• Selected Financial Ratios and Analyses

  • Analyzing a company's financial statements allows interested parties (investors, creditors and company management) to get an overall picture of the financial condition and profitability of a company.
  • There are several ways to analyze a company's financial statements.
  • When using comparative financial statements, the calculation of dollar or percentage changes in the statement items or totals over time is horizontal analysis.
  • However, it is important to note that determination of a company's solvency is based on various factors and not just the value of the current ratio.
  • Summarize how an interested party would use financial ratios to analyze a company's financial statement

• Overview of Statement Changes and Errors

  • Please note: an error correction is the correction of an error in previously issued financial statement; it is not an accounting change.
  • In order to properly correct an error, it is necessary to retrospectively restate the prior period financial statements.
  • In order to restate the financials the company must:
  • Adjust the financial statements for each prior period presented, to reflect the error correction.
  • Keep in mind the financial statements need to be re-run no matter what.