Notes to the Financial Statements- Reporting Requirements for Annual Financial Reports

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. Furthermore, it facilitates the evaluation and comparison of the business performance, financial position, cash flows, and risks with other businesses and periods. Additionally, it enhances the accountability of management and board directors for the preparation and presentation of financial statements. This helps auditors and regulators verify and monitor the compliance and accuracy of financial statements, increasing stakeholders’ confidence in the business and its management. Explanatory notes are discussions of items that accompany the financial statements, which are the income statement, the balance sheet, and the statement of cash flows.

• Beyond the editorial, an annual report summarizes financial data and includes a company’s income statement, balance sheet, and cash flow statement.
• For example, two companies may report the expenses related to the purchase of the same item differently.
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Unlike the balance sheet, the income statement covers a range of time, which is a year for annual financial statements and a quarter for quarterly financial statements. The income statement provides an overview of revenues, expenses, net income, and earnings per share. The notes to the financial statements communicate information necessary for a fair presentation of financial position and results of operations that is not readily apparent from, or not included in, the financial statements themselves.

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Use the formatting provided (including the note number/topic sequence) as these schedules are critical to consolidating the notes to the statewide financial statements. You should consider our materials to be an introduction to selected accounting and bookkeeping topics, and realize that some complexities (including differences between financial statement reporting and income tax reporting) are not presented. Therefore, always consult with accounting and tax professionals for assistance with your specific circumstances. Securities and Exchange Commission have mandated XBRL for the submission of financial information. The growth of the Web has seen more and more financial statements created in an electronic form which is exchangeable over the Web. These types of electronic financial statements have their drawbacks in that it still takes a human to read the information in order to reuse the information contained in a financial statement.

The balance sheet reports a company’s financial health through its liquidity and solvency, while the income statement reports a company’s profitability. A statement of cash flow ties these two together by tracking sources and uses of cash. Together, financial statements communicate how a company is doing over time and against its competitors. Footnotes to the financial statements serve as a way for a company to provide additional explanations for various portions of their financial statements. Footnotes to the financial statements thus report the details and additional information that is left out of the main financial statements such as the balance sheet, income statement, and cash flow statement. Alone, the balance sheet doesn’t provide information on trends, which is why you need to examine other financial statements, including income and cash flow statements, to fully comprehend a company’s financial position.

Management discussion and analysis

Are you interested in gaining a toolkit for making smarter financial decisions and communicating decisions to key stakeholders? Explore our online finance and accounting courses, and download our free course flowchart to determine which best aligns with your goals. You can also use the Notes library to add notes from a specific note category using the Add () button in the note area. In the CATEGORIES and GROUPS tabs, you can browse a specific note category or trial balance group by selecting the arrow (). Please declare your traffic by updating your user agent to include company specific information.

Typically, a personal financial statement consists of a single form for reporting personally held assets and liabilities (debts), or personal sources of income and expenses, or both. The form to be filled out is determined by the organization supplying the loan or aid. Notes to the financial statements provide important disclosures such as depreciable assets the basis of preparation, the reporting currency, and the accounting policies. Besides, the notes reveal the methods and estimates that have been used in the preparation of the financial statements. These revelations are particularly important when comparison is being made between two or more companies based on their financial statements.

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In addition to the annual consolidated financial statements, the publicly-held corporation will issue quarterly consolidated financial statements. These are referred to as interim financial statements and will be more condensed (fewer details), reviewed by the registered CPA and will be part of the corporation’s Quarterly Report to the Securities and Exchange Commission (Form 10-Q). Notes to the financial statements are required by the Financial Accounting Standards Board.

Besides explaining the different intangible assets the company owns via an explanatory note, the business needs to explain how it has determined the intangible asset’s value showing on the balance sheet. Last, financial statements are only as reliable as the information being fed into the reports. Too often, it’s been documented that fraudulent financial activity or poor control oversight have led to misstated financial statements intended to mislead users. Even when analyzing audited financial statements, there is a level of trust that users must place in the validity of the report and the figures being shown. When analyzing financial statements, it’s important to compare multiple periods to determine if there are any trends as well as compare the company’s results to its peers in the same industry.

Further reading

Footnotes to the financial statements refer to additional information that helps explain how a company arrived at its financial statement figures. They also help to explain any irregularities or perceived inconsistencies in year to year account methodologies. It functions as a supplement, providing clarity to those who require it without having the information placed in the body of the statement.

For example, the financial statement footnotes will look different for a company that follows IFRS standards compared to US GAAP. Publicly held companies will require even more extensive financial statements and footnotes mandated by authorities like the Securities and Exchange Commission (SEC) in the United States. Auditors will also use the financial statements and their footnotes to help understand the company’s financial position. Their findings within the audit will be based almost as heavily on the footnotes as the other core areas of the financial statements. Notes to the financial statement include important factors that were used in preparing the statement. Notes will include information such as cash or accrual accounting procedures, valuation me5ids for inventory, reporting of events, intangible assets, and contingent liabilities.

Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. Sample Text – example of common or standard language meant to help write the note.

Often, the footnotes will be used to explain how a particular value was assessed on a specific line item. This can include issues such as depreciation or any incident where an estimate of future financial outcomes had to be determined. When a U.S. corporation’s shares of stock are traded on a stock exchange, we say that the shares are publicly traded or publicly held. It’s the amount of money that would be left if all assets were sold and all liabilities paid.

Notes are used to disclose important information that explains how accountants applied GAAP in their financial reporting of the company. In the United States, especially in the post-Enron era there has been substantial concern about the accuracy of financial statements. Corporate officers—the chief executive officer (CEO) and chief financial officer (CFO)—are personally responsible for fair financial reporting that provides an accurate sense of the organization to those reading the report. Below are some examples of financial statement footnotes pulled from General Electric Company’s financial statements (fiscal year ended December 31, 2020). Specific line items that require more explanation will almost always come with a related footnote to help clarify any missing information.

Notes that disclose subsequent events

The cash flow statement (CFS) measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments. The balance sheet provides an overview of a company’s assets, liabilities, and shareholders’ equity as a snapshot in time. The date at the top of the balance sheet tells you when the snapshot was taken, which is generally the end of the reporting period.

Notes to the accounts are the additional information and explanations that accompany the financial statements. They provide more details and clarity about the items, amounts, and transactions reported in the balance sheet, income statement, statement of changes in equity, and cash flow statement. Notes to the accounts should be clear, concise, and informative, and they should follow a logical order and structure. The standard requires a complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows. It is important for analysts and investors to read the footnotes to the financial statements included in a company’s interim and annual reports. Footnotes also explain in detail why any irregular or unusual activities such as a one-time expense has occurred and what its impact may be on future profitability.

In ExxonMobil’s statement of changes in equity, the company also records activity for acquisitions, dispositions, amortization of stock-based awards, and other financial activity. This information is useful to analyze to determine how much money is being retained by the company for future growth as opposed to being distributed externally. Instead, it contains three sections that report cash flow for the various activities for which a company uses its cash. Any information that is needed to clarify or add additional detail to a financial statement will be found in the footnotes.