Question

Jane Johnson, is the Controller for a company that has recently become publicly traded, RonJohn Sports.   RonJohn Sports has retail sports stores, a thriving on-line business, a line of surf boards and swim/beach clothes. RonJohn Sports’ management reviews performance in according to the four business segments listed above.

The CEO, Ron John read the news article printed below and, after reviewing his company’s annual report, makes the following statement to you. Why do we disclose all of this information don’t you see (referring to the article) that investors don’t want all this information? Ron says “I don’t know why investors can’t just receive an income statement and balance sheet and skip the other pages of disclosure?”

Mr. John goes on further “I also don’t like disclosing all the information about our business segments, why don’t we just break the segments into North, South, East and West?”

List and describe what is contained in ten of the common financial statement notes (Subsequent Events, Significant Accounting Policies, etc.). This part does not need to be in memo form.

Answer 1

Answer

The external financial statements of a U.S. corporation should consist of a complete set of the following:

• Income statement (statement of earnings, statement of operations)
• Statement of comprehensive income
• Balance sheet (statement of financial position)
• Statement of cash flows (cash flow statement)
• Statement of stockholders' equity (statement of shareholders' equity, statement of equity)
• Notes to the financial statements

These financial statements become "external" when they are distributed to people and organizations not involved in the corporation's operations. Some examples of external users are current investors and lenders, potential investors and lenders, financial analysts, certain government agencies, credit rating organizations, certain customers and suppliers, and others.

The notes to the financial statements are integral part of a company's external financial statements. They are necessary because not all relevant financial information can be communicated through the amounts shown (or not shown) on the face of the financial statements. Generally, the notes are the main method for complying with the full disclosure principle and are also referred to footnote disclosures.

The first note to the financial statements is usually a summary of the company's significant accounting policies for the use of estimates, revenue recognition, inventories, property and equipment, goodwill and other intangible assets, fair value measurement, discontinued operations, foreign currency translation, recently issued accounting pronouncements, and others.

The first note is followed by many additional notes that contain the details (including schedules of amounts) for items such as inventories, accrued liabilities, income taxes, employee benefit plans, leases, business segment information, fair value measurements, derivative instruments and hedging, stock options, commitments and contingencies, and more.

Each external financial statement should also include a reference (usually as a footer) which states that the accompanying notes are an integral part of the financial statements.

It is very important for investors to read the footnotes to the financial statements included in a company's periodic reports. These notes contain important information on such things as the accounting methodologies used for recording and reporting transactions, pension plan details and stock option compensation information — all of which can have material effects on the bottom-line return that a shareholder can expect from an investment in a company.

Footnotes on financial statements serve as a way for a company to provide additional explanation of various portions of the statement. It functions as a supplement, providing clarity to those who require it without having the information placed in the body of the statement.

In Notes to Accounts, it is covered all the introduction about the company,covers all the Accounting Standards, Relate Party transactions, Segment Reporting.

Hence, Notes to Accounts are important part of the financial statements and we cannot have a financial statements without Notes to Accounts.