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What are Notes to the Financial Statements?

Osmand Vitez
Osmand Vitez

A company will often use notes to the financial statements to explain financial information beyond the numbers listed on the reports. These notes can accompany the official release of financial information to outside stakeholders. The notes may include information relating to debt, going concern, accounts, and liabilities. The notes to the financial statement often provide an explanation of specific transactions or financial information on the statements. The additional information gives clarity or provides better information for stakeholders.

Notes to the financial statement regarding debt provide information on repayment terms, upcoming balloon payments, or changes to the loan per earlier agreements. This information is important for individuals to gauge a company’s ability to manage its leverage. For example, a company experiencing slow cash flow with an upcoming balloon payment may need to explain how it plans to make this payment. Refinancing a loan may also be part of these notes.

Man climbing a rope
Man climbing a rope

A company offers information about its ability to remain a going concern in notes to the financial statements. A going concern means a company has the ability to remain in business for the near future. Auditors are often most helpful in preparing this statement. Investors do not typically have the ability to review a company’s financial information. They therefore rely on auditors to review the information and provide a comment on the company’s ability to remain a going concern.

Specific accounts may also include notes to the financial statements. Among the most common ones are inventory and depreciation. Inventory accounts may require notes on write downs, obsolete inventory, valuation method, or other information. This allows stakeholders to determine how well a company manages its products. Depreciation accounts require an explanation on the formal preparation method for calculating depreciation expense.

Liabilities represent money owed by a company to another party. The notes to the financial statements can provide any analysis necessary for stakeholders. Common information explained may include why there is a sudden increase in liabilities, how a company will reduce specific liabilities, or the need for short-term loans to help run daily operations. These notes may be seen less often on financial statements.

Publicly held companies often have specific requirements for including notes to the financial statements. Governing bodies will decide which specific transactions or accounts will need additional statements. This information includes information necessary for investors to be well informed about a company’s specific transactions. The requirements focus on not misleading investors on the company’s financial health.

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