Notes to Financial Statements | AccountingCoach (2024)

In addition to the amounts that are reported on the face of the financial statements, US GAAP requires that additional information be provided as notes to the financial statements. To alert the readers of these important disclosures, each financial statement is required to make reference to them. The following are some examples of the reference found at the bottom of each financial statement:

  • See accompanying notes.
  • See accompanying notes to the financial statements.
  • The accompanying notes are an integral part of these financial statements.
  • The accompanying Notes to the Financial Statements are an integral part of this statement.
  • See Notes to Consolidated Financial Statements.

The notes (or footnote disclosures) are required by the full disclosure principle because the amounts and line descriptions on the face of the financial statements cannot provide sufficient information. In fact, there may be some large potential losses that cannot be expressed as a specific amount, but they are critical information for lenders, investors, and others.

The notes usually begin with the corporation's significant accounting policies. This note describes how revenues were recognized on the income statement, how inventory is accounted for, etc. Our review of the financial statements of 20 publicly-traded corporations showed notes on the following topics:

  • Nature of business
  • Investments
  • Employee benefit plans
  • Basis of consolidation
  • Accounts receivable
  • Pensions and postretirement health plans
  • Use of estimates
  • Inventories
  • Fair value measurement
  • Revenue recognition
  • Property, plant and equipment
  • Long-term debt and available credit
  • Fiscal periods
  • Goodwill and other intangible assets
  • Commitments and contingencies
  • Foreign currency translation
  • Deferred compensation
  • Stock options
  • Business segments
  • Leases
  • Stock repurchase program
  • Significant customers
  • Impairment of long-lived assets
  • Accumulated other comprehensive income
  • Cash and cash equivalents
  • Accrued liabilities
  • Recent accounting pronouncements

Sophisticated investors and lenders will read closely the notes to the financial statements. If the corporation's shares of stock are publicly traded, they will also read the additional information presented in the corporation's Annual Report to the Securities and Exchange Commission, Form 10-K.

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Other Information Pertaining to Financial Statements

Consolidated Financial Statements

It is common for a large business to consist of several legal corporations. However, those separate legal corporations (called subsidiaries) are owned and controlled by one of the corporations (the parent corporation). The shares of common stock of the parent corporation are often traded on a major stock exchange. Those stockholders are interested in receiving financial statements which report the results and financial position of the entire economic entity, which is all of the subsidiaries and the parent corporation.

The consolidated financial statements report the results of the transactions that occurred between the economic entity and its customers, suppliers, and others outside of the economic entity. For example, the consolidated income statement will report the sales made to customers who are outside of the economic entity. (The sales and the related purchases made between the subsidiaries and between the subsidiaries and the parent corporation are not included.)

Similarly, a consolidated balance sheet reports the amounts owed to lenders outside of the economic entity. (The loans and borrowings between subsidiaries and between the subsidiaries and the parent corporation are not included.)

In the review of 20 corporations whose stock was traded on a major stock exchange, all of the corporations had:

  • Consolidated income statements
  • Consolidated statements of comprehensive income
  • Consolidated balance sheets
  • Consolidated statements of stockholders' equity
  • Consolidated statements of cash flows
  • Notes to the consolidated financial statements

Comparative Financial Statements

When a financial statement reports the amounts for the current year and for one or two additional years, the financial statement is referred to as a comparative financial statement. For example, the income statement of a large corporation with its shares of stock traded on a stock exchange might have as its heading "Consolidated Statements of Income" and will report the amounts for 2022, 2021, and 2020. This allows the user to compare sales that occurred in 2022 to the sales that occurred in 2021 and in 2020.

The balance sheet of the same corporation will have as its heading "Consolidated Balance Sheets" and will report the amounts as of the final instant as of December 31, 2022 and the final instant as of December 31, 2021.

Audited Financial Statements

Some corporations may be required to have their external financial statements audited. This requires independent certified public accountants to provide assurance that the financial statements present fairly the financial position, results of operations, and cash flows of the corporation according to US GAAP.

If a corporation's stock is not traded on a stock exchange and no one requires audited financial statements, the financial statements do not have to be audited. (Corporations with its stock trading on a stock exchange must have its financial statements audited by a registered firm of independent CPAs.)

Publicly-Traded Corporations

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. We also refer to the corporation as a publicly-traded corporation.

In addition to US GAAP the external financial statements of a publicly-traded U.S. corporation must comply with the reporting requirements of the U.S. government agency, Securities and Exchange Commission (SEC). Among the many required reports is the Annual Report to the SEC, Form 10-K. The Form 10-K must include audited, comparative financial statements.

Typically, the large, publicly-held corporations will be issuing consolidated financial statements. Examples of the headings are shown below. (In parentheses we show the number of years for which amounts will appear.)

  • Consolidated statements of income (3 years)
  • Consolidated statements of comprehensive income (3 years)
  • Consolidated balance sheets (end-of-year amounts for 2 years)
  • Consolidated statements of stockholders' equity (3 years)
  • Consolidated statements of cash flows (3 years)
  • Notes to the consolidated financial statements

Since the corporation's shares of stock are publicly traded, the consolidated financial statements must be audited by a registered firm of independent certified public accountants.

Other parts of Form 10-K include Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as a certification by management on the corporation's internal controls, a statement of management's responsibility for the financial statements, disclosures of risk, legal proceedings, and more.

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).

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Please Note...

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.

I'm an expert in accounting and financial reporting, with a deep understanding of the principles and standards that govern these areas. My expertise is grounded in practical experience and a comprehensive knowledge of US Generally Accepted Accounting Principles (GAAP).

Now, let's delve into the concepts mentioned in the article about financial statements and disclosures under US GAAP.

The article emphasizes the importance of additional information provided in notes to the financial statements, beyond what's reported on the face of the statements. This is a crucial aspect of financial reporting, ensuring transparency and meeting the full disclosure principle.

  1. References to Notes: The article mentions various ways financial statements refer to accompanying notes, highlighting their integral role in providing essential information. Examples include "See accompanying notes" and similar phrases, indicating that readers should refer to the notes for a comprehensive understanding.

  2. Nature of Business and Accounting Policies: The notes typically commence with significant accounting policies, shedding light on how various aspects like revenue recognition, inventory accounting, and more are handled. This ensures that readers are informed about the key principles guiding the financial statements.

  3. Consolidated Financial Statements: Large businesses often consist of multiple legal entities (subsidiaries), and consolidated financial statements are essential to present the overall economic entity's financial position and performance. The article covers consolidated income statements, balance sheets, statements of stockholders' equity, and cash flows. This practice provides a holistic view for stockholders and other stakeholders.

  4. Comparative Financial Statements: Comparative financial statements allow users to analyze performance and changes over multiple years. The article explains how income statements and balance sheets may present data for the current year alongside one or two prior years, enabling meaningful comparisons.

  5. Audited Financial Statements: Some corporations are required to have their external financial statements audited by independent certified public accountants. This process ensures that the financial statements fairly represent the corporation's financial position, results of operations, and cash flows in accordance with US GAAP.

  6. Publicly-Traded Corporations and SEC Reporting: When a U.S. corporation's shares are publicly traded, it must comply with Securities and Exchange Commission (SEC) reporting requirements. The Form 10-K, an Annual Report to the SEC, includes audited consolidated financial statements, management's discussion and analysis, certifications, and other disclosures.

  7. Interim Financial Statements: Publicly-held corporations issue quarterly consolidated financial statements (interim financial statements) in addition to annual statements. These are more condensed, reviewed by CPAs, and are part of the Quarterly Report (Form 10-Q) submitted to the SEC.

This overview should provide a comprehensive understanding of the key concepts discussed in the article on financial statements and disclosures under US GAAP. If you have any specific questions or need further clarification on any point, feel free to ask.

Notes to Financial Statements | AccountingCoach (2024)

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