Footnotes are essential to financial statements because they provide additional information and explain the figures presented. They help clarify the details that may not be self-explanatory by those intended to read the report. The footnotes make it possible for investors and shareholders to evaluate a firm’s finances within a short duration (Abernathy et al., 2019). The critical elements of footnotes are crucial in evaluating different company situations and their financial declarations.
The fundamental essentials typically included in footnotes are information on accounting policies and procedures utilized, details on significant transactions and events, contingencies and commitments, and data on financial instruments. Companies decide on the nature of the information they need to include in their financial statement footnotes by adhering to Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) (Abernathy et al., 2019). These standards offer a firm framework for us in preparing financial statements, including the information that should be detailed in footnotes.
The purpose of footnotes is to provide additional information and context for the numbers presented in the financial statement. Footnotes are vital as they supply investors and analysts with additional details not included in the main financial statement (Abernathy et al., 2019). Companies must avoid leaving or omitting information from reports (How to Read a 10-K/10-Q, 2021). Financial statements need additional footnotes to clarify numbers because the financial report numbers alone may not offer a complete picture of the company’s financial health.
When evaluating companies and their use of footnotes, it is crucial to understand how they utilize them. Alphabet Inc., Tesla Inc, and Walmart utilize footnotes to provide extra information on accounting policies, contingencies, and commitments (Alphabet Inc, 2022, Tesla Inc, 2021, Walmart, 2022). While the companies may have similar uses for footnotes, their specific applications may differ (Abernathy et al., 2019). Organizations utilize footnotes to enrich the comprehension of their financial data and cover all details that may need clarification.
In conclusion, footnotes play a crucial role in financial statements by providing additional information and context for the numbers presented in the statement. Understanding the key elements and purpose of footnotes and evaluating different company situations and their applications of footnotes provides a better comprehension of a company’s financial health. It is essential to pay close attention to the specific information provided in the footnotes when evaluating a firm financial report.
References
Abernathy, J. L., Guo, F., Kubick, T. R., & Masli, A. (2019). Financial statement footnote readability and corporate audit outcomes. Auditing: A Journal of Practice & Theory, 38(2), 1-26. Web.
Alphabet Inc. (2022). Web.
How to Read a 10-K/10-Q. (2021). Investor.gov. Web.
Tesla, Inc. (2021) Web.
Walmart (2022) Web.