Notes to the financial statements disclose the detailed assumptions made by accountants when preparing a company’s: income statement, balance sheet, statement of changes of financial position or statement of retained earnings. The notes are essential to fully understanding these documents.
Usually, the first notes in the series explain the “basis for accounting”—if cash or accrual rules were used to prepare the documents—and the methods used to report amortization/depreciation expenses.
The rest of the notes explain, in greater detail, how the figures have been calculated. This gives the reader the information needed to do deeper analysis.
More about the notes to the financial statements
Below is an illustrative example of the first page of a set of notes:
Notes to financial statements
Year ended March 31, 2012
ABC Co. is incorporated under the Business Corporations Act of the Province of Ontario. The company’s principal business activity is to manufacture and distribute widgets to Canadians.
Significant accounting policies
Basis of accounting
- The accounting policies of the company are in accordance with the Canadian accounting standards for private enterprises (ASPE).
- Sales and income from sales and expenses are recognized on the basis of accrual accounting.
Inventories are valued at the lower of cost and net realizable value.
Equipment is stated at acquisition cost. Amortization is provided at the following annual rates and methods:
- Stamping equipment—20% declining balance
- Computers—40% declining balance
- Test equipment—7 years, straight-line