The Financial Statement Notes

Financial statements are accompanied by financial statement notes and supplementary information that help the users of financial statements to understand the information that is reported.

Importance of Financial Statement Notes and Supplementary Information

Notes to the financial statements provide important disclosures such as the basis of preparation, the reporting currency, and the accounting policies, methods, and estimates that have been used in preparing the financial statements. This disclosure is particularly important when a comparison is being made between two or more companies on the basis of their financial statements.

The accounting standards (IFRS and US GAAP) afford companies a certain amount of flexibility with respect to the manner in which certain transactions or activities can be reported. For example, two companies may report the expenses related to the purchase of the same item in a different manner. Due to these differences in reporting choices that companies can make, it is often times necessary for appropriate adjustments to be made to the figures reported in the financial statements before meaningful comparison between companies’ financial data can be made.

Important disclosures on financial risks, contingencies, operating segments’ performances, and related party transactions can also assist analysts in arriving at expectations on a company’s future performance and financial position.

Management Commentary

A management commentary or management’s discussion and analysis report (MD&A) is usually included as a part of public companies’ annual reports. In this section, a company’s management usually discusses matters of concern to the company such as the results of its operations, risk strategies employed, planned capital expenditure, and future outlook.

The MD&A is a useful starting point for understanding the financial statements and can also provide key insights into a company’s potential future performance.

Question

Information on a company’s results of operations, planned capital expenditure, and future outlook is usually found in which of the following?

A. Management commentary

B. Notes to the financial statements

C. Auditor’s report

Solution

The correct answer is A.

In a management commentary, a company’s management discusses matters of concern to the company such as the results of its operations, risk strategies employed, planned capital expenditure and future outlook.

Options B and C are incorrect because they do not typically report this sort of information.

Reading 19 LOS 19c:

Describe the importance of financial statement notes and supplementary information – including disclosures of accounting policies, methods, and estimates – and management’s commentary.

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