The financial statements in an annual report are comprised by the accountant and make up the bulk of its content. Although the calculations and data divulge much about a company’s current financial health, the note section is even more revealing. The notes themselves can actually be quite extensive, covering material information too detailed to include in the actual financial statements.
Every investor should not only pay attention to the number crunching of the financial statements but should read the notes thoroughly as well. The notes to financial statements include information such as accounting methods, commitments, lease obligations, contingencies, pensions plan details, stock option compensation information, and any significant events affecting the company during the fiscal year.
There are various accounting methods to choose from to calculate the same type of transactions. Therefore, few annual reports can be considered standardized. For this reason, accounting methodology must be disclosed in the notes. If not, the company may choose to list these in a separate section called “Accounting Policies.” A company will note, for example, the various methods used in their inventory methods and depreciation calculations.
The methods are important to understand because they have a direct affect on how the balance sheet is valued and how the net income is calculated. The only way to accurately compare a company’s financial statements from year to year is by verifying the company regularly used the same valuation methods. The same can be said for the comparison of two different companies.
Therefore, the disclosures of accounting methods consistently mentioned in Note One are very important to an investor’s evaluation.