Question

Briefly discuss in what ways are the notes critical to understanding the financial statements and in evaluation the firm s performance and financial health?
What information in particular as pertains to the balance sheet may be relevant to an external user?

Answer 1

Notes to financial statements are very important in a way in understanding the financial statements more clearly.
As notes supports additional information about the method of valuation, time period for such valuation, etc used while the preparation of such financial statements.

Notes also provides clear understanding and proper explanation for various types of calculations.
Notes are critical to understanding the financial statements and in evaluation the firms performance and financial health as these tells about the accounting policies used, principal for accounting followed, how the revenue recognition considered and various contingencies and risks firm is currently in.

External users always release on the financial statements prepared by the company. They always measures the company's past performance with current position.
External users also keep an eye on the debts incurred by the company and the liquidity position of the company.

Financial statement (balance sheet) contains information about the financial position which is also very important for the external users.

Various other information like amount of shares capital, long term liabilities, fixed assets, cash balance, etc on particular as pertains to the balance sheet may be relevant to an external user.