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Session I – C : Corporate Finance: Accounting Notes

Concept Title: The Accounting Notes

Explanation:    Explains the different types of Accounting Notes and the appropriate way to read Financial Statements to extract information

The notes are the source of information on minor details that have major impacts on current and future earnings as well as the financial health of a firm. These details could range from accounting changes to events and items having a material impact on current and future earnings. The notes basically include information about anything and everything that can have a significant impact on the statements of the business.

The Right Way

The right way to read financial statements is from the back. Always start from the notes. The balance sheet, the Profit and Loss account and the statement of cash flows contain valuable information, but it is the notes that contain the real “meat”.

Here are examples of two accounting notes from the Annual Report of Electronic Arts, a game programming company. The first note explains when the business recognizes revenues with respect to product sales, the second explains how assets are depreciated.

Accounting Note A – Product Sales

The Company recognizes revenue upon shipment of its packaged goods products based on “FOB Shipping” terms. Under FOB Shipping terms, title and risk of loss are transferred when the products are delivered to the customer. In order to recognize revenue, the Company must not have any continuing obligations and it must also be probable that the Company will collect the accounts receivable. Subject to certain limitations, the Company permits customers to obtain exchanges within certain specified periods and provides price protection on certain unsold merchandise. Revenue is recognized net of an allowance for returns and price protection.

Accounting Note B – Property Plant and Equipment

Property and equipment are stated at cost. Depreciation is calculated using the accelerated and straight-line methods over the following useful lives:

Line ItemDepreciation Term
Building20 to 25 years
Computer Equipment & Software3 to 7 years
Furniture and Equipment3 to 7 years
Leasehold improvementsLesser of the lease terms or the estimated useful lives of the improvements

1) Mr. Oberoi is considering investing in a relatively new firm, Tanzamaniac, Ltd. He has the firm’s Profit and Loss Statements, the Statements of Cash Flows, Accounting Notes and the Balance Sheets for the last 3 years. What should he look at to come to a decision?

  1. The Statements of Cash Flows and Accounting Notes
  2. The Balance Sheets
  3. The Profit and Loss Statements
  4. All of the Above

2 ) Josh has been asked to find out the state of NYCX, Inc. as on 31st December 1999, by his boss. The boss is not interested in the history of the company, or other details. Which of the following documents should he request from the company records?

  1. The Balance Sheet
  2. The Statement of Cash Flows
  3. The Income Statement
  4. The Accounting Notes

End of Session Exercise – Go to ibinc.com

Order 5 financial statements of the 5 companies that you either know very well or would like to know very well. The statements should arrive within the next fifteen days. Once they arrive go through them one by one. The first balance sheet you read will leave you completely confused. But the next one would be better. By the time you reach the fifth, things will begin to make sense.

Basic Accounting Short Course for small business – Course Guide

One thought on “Session I – C : Corporate Finance: Accounting Notes”

  1. Stanley says:

    low or high volume means nothnig when you’re not including dark-pool trading. They’re not. Check out user/pulsescan72 (vulcan report) he goes into this a few times and many other aspects of hidden trading (order execution flow watching from a pit-seat, that kind of thing, and that’s built into his models). My models do not include this explicitly. I’m looking at limited data, price-action predictions. We tend to find similar numbers for entry/exit but I show the future charts

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