Financial statements may be accompanied by notes that provide additional information on debt, going concern, accounts, and liabilities. These notes help interested parties understand specific transactions or financial information and assess a company’s ability to manage its leverage and remain in business. Publicly traded companies have specific requirements for including notes in financial statements to avoid misleading investors.
A company will often use notes on financial statements to explain financial information beyond the numbers listed on the reports. These notes may accompany the official release of financial information to external interested parties. The notes may include information related to debt, going concern, accounts and liabilities. The notes to the financial statements often provide an explanation of specific transactions or financial information in the financial statements. Additional information provides clarity or provides better information for interested parties.
Notes to the financial statement regarding debt provide information about payment terms, upcoming balloon payments, or changes to the loan based on prior agreements. This information is important for people to assess 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. The refinancing of a loan can also be part of these notes.
A company provides information about its ability to continue as a going concern in the notes to the financial statements. A going concern means that a company has the ability to remain in business for the foreseeable future. Auditors are often very helpful in preparing this statement. Investors often do not have the ability to review a company’s financial information. Therefore, they rely on the auditors to review the information and provide comment on the company’s ability to continue as a going concern.
Specific accounts may also include notes to the financial statements. Among the most common are inventory and depreciation. Inventory accounts may require depreciation notes, obsolete inventory, valuation method, or other information. This allows interested parties to determine how well a company manages its products. Depreciation accounts require an explanation of 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 necessary analysis for interested parties. 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 borrowing to help run daily operations. These notes may be seen less frequently in financial statements.
Publicly traded companies often have specific requirements for including notes in financial statements. The governing bodies will decide which specific transactions or accounts will require 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 about the financial health of the company.
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