Financial Statement Footnotes Definition
There are many types of financial reporting documents but they are generally just different forms of the same reporting format. What is needed to create a viable financial accounting report is consistency across companies and industries. The most frequently used reporting document in business today is the annual report. Annual reports can be thought of as an all-inclusive summary of main events and financial health over the past year. Financial statement footnotes are found in financial reports, such as an annual report or a 10-K filing. A footnote literally means “below the feet”. Footnotes can be found at the bottom of any financial report; often below the main body of text. Sometimes they are under the body of text and sometimes they simply have their own numbering system in a section called “notes to financial statements”.
Why Do Companies Include Them in Their Annual Report?
The footnotes give readers supplemental information about the financial condition of a company. Footnotes basically explain the financial transactions that took place during the year reported, which can be found within the financial statements. What is included in footnote explanations varies from company to company and should always be taken into consideration when reading them. Footnotes are used to provide additional information about a company’s financial statements. What is found within the footnotes can help investors make better decisions about their investments by providing insight into areas not found in the financial statements.
What Is the Purpose of a Company Footnote?
Footnotes should be read as carefully as the other parts of a company’s financial statement. They contain information on how a business has been operating and can point out areas that might need attention. Footnotes can highlight specific areas of financial statements that investors should pay more attention to, such as significant changes, new accounting policies, and other items that impact the bottom line. The company’s financial statements and footnotes should be read and understood together.
Who Should Read the Footnotes of a Company’s Annual Report?
The following groups of readers might want to look at a company’s footnotes: analysts, researchers, academics, and managers. Reading between the lines can help these professionals get a better idea of what is going on within a company and how it will affect their operations. What shareholders, creditors, and other stakeholders should know about the business can be found in its footnotes; they might even help investors detect fraud.
How to Read a Company’s Financial Statement
As mentioned above, financial statement footnotes should always be read carefully and thoroughly, as they can provide a more detailed explanation of a company’s financial statements. What the footnotes contain is sometimes found nowhere else in the report. Before reading a company’s annual report, make sure you have at least a general understanding of what makes up an income statement, a balance sheet, and a statement of cash flows. What is included within these documents can help one better understand financial statement footnotes.
Common Company Footnotes Examples and What They Mean
There are many common types of what might be found in a company’s footnotes. Below are some of the examples:
Closing cash is found when a footnote tells us that the cash balance at the end of the year is lower than it was at the start of the year. What this means is that there might be something important in this footnote about where all of the company’s money went during that time.
Closing Marketable Securities
Marketable securities represent investments companies hold, such as shares in other companies, government bonds, and others. When a footnote says that the closing marketable securities are higher than at the start of the year, it means that the company’s investments have increased.
A company that has a footnote saying that the closing amount of deferred revenue is higher than it was at the beginning of the year may have sold rights to future income in exchange for cash during this time.
The Bottom Line
Financial statement footnotes are an extremely important part of a company’s annual report. What they contain can be found nowhere else and will provide the reader with information on how well a business is operating, its revenue and expenses, and other key factors for investors. What shareholders, creditors, and other stakeholders should know about the business can also be found in its footnotes; they might even help investors detect fraud. Before reading a company’s footnotes, make sure you have at least a general understanding of what makes up an income statement, a balance sheet, and a statement of cash flows. What is included within these documents can help readers better understand financial statement footnotes. Common types of what might be found in a company’s footnotes are closing cash, closing marketable securities, and deferred revenue.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.