The Role of Footnotes in Financial Statements – Functions and Corporate Examples

The Role of Footnotes in Financial Statements – Functions and Corporate Examples

Key Elements of Footnotes

Footnotes help companies provide additional information about different portions of their financial statements. They provide additional information that may be left out in the main financial statements, such as the balance sheet, cash flow, and income statements. Footnotes are put separately to ensure financial statements are clear. If the notes were to be included in the main statements, they would possibly cloud out the vital components of the financial statements.

One of the key elements of footnotes is the accounting methods. Accounting methods mostly appear at the beginning of footnotes, indicating the company’s accounting policies (Godfrey et al., 2010). In the same breath, footnotes are divided into different accounting areas, such as revenue and stock, and an account of how their value is determined. For instance, in the revenue section, footnotes include a revenue recognition note that outlines how revenue is determined, given the complex nature of business. For example, Ford Company recognizes a sale after the customer takes possession of the motor vehicle they purchase.

Also, footnotes indicate vital financial estimates. For instance, obsolete stock and bad debt estimates are included in the footnotes section (Godfrey et al., 2010). Including these estimates helps those who utilize these financial statements assess the management’s potential judgment of the financial statements. Moreover, companies determine what information to include in the footnotes section using different phenomena. First, the accounting principles a company aligns with, such as GAAP and IFRS, help determine what to include in the footnotes. Also, relevant regulatory standards and professional judgment by the company’s accountants guide them in determining the elements of footnotes.

Purpose of Footnotes

According to Robinson et al. (2012), one of the primary purposes of footnotes is to provide vital information to stakeholders such as equity investors and lenders. These stakeholders are not involved in the day-to-day business operations and may require additional information to understand the state of the business. Since the hallmark of a successful business is to answer questions before they are asked, footnotes come in handy since they answer most of the questions these stakeholders may want to pose in the future.

Also, footnotes help protect the business from litigation since most litigations often result from non-disclosure. Such litigations cost the business highly in terms of hiring lawyers and potential penalty payments. By including detailed footnotes describing its financial statements, the business protects itself from avoidable costs, channelling the money to other useful purposes.

As mentioned earlier, revenue and inventory are some of the prominent components of the footnotes. Therefore, a look at a company’s footnotes offers information about its business structure (Robinson et al., 2012). Insights such as when a business considers stocks to have become obsolete are crucial for stakeholder accountability.

Applications of Footnotes

Companies utilize footnotes in various ways. On the one hand, Walmart mostly uses footnotes to explain accounting policies, estimates, and other contingencies. Since inventory is the company’s most significant asset, Walmart explains stock valuation processes in the footnotes. Besides, the company uses estimates to provide information regarding third-party transactions and subsidiary investments. On the other hand, footnotes at Alphabet Inc. mostly focus on revenue recognition standards and day-to-day operations (Securities Exchange Commission, 2022). The company also uses footnotes to explain how foreign currency fluctuates and its impact on company revenue. On the other hand, Tesla has adopted a slightly different approach to analyzing its footnotes since it’s a relatively young company. Tesla’s footnotes mostly focus on research and development and technology interventions.

References

Godfrey, J., Hodgson, A., Tarca, A., Hamilton, J., & Holmen, S. (2010). Accounting. John Wiley & Sons, Inc.

Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2012). International financial statement analysis (Vol. 39). John Wiley & Sons.

Securities Exchange Commission. (2022, April 26). Alphabet Inc. Consolidated statements of comprehensive income. Www.sec.gov. https://www.sec.gov/ix?doc=/Archives/edgar/data/0001652044/000165204422000029/goog-20220331.htm#_16

ORDER A PLAGIARISM-FREE PAPER HERE

We’ll write everything from scratch

Footnotes can provide additional information or details for financial statements.

The Role of Footnotes in Financial Statements – Functions and Corporate Examples

This short paper will allow you to identify the main function of footnotes and evaluate footnotes from various companies.