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 Item||Depreciation Term|
|Building||20 to 25 years|
|Computer Equipment & Software||3 to 7 years|
|Furniture and Equipment||3 to 7 years|
|Leasehold improvements||Lesser 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?
- The Statements of Cash Flows and Accounting Notes
- The Balance Sheets
- The Profit and Loss Statements
- 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?
- The Balance Sheet
- The Statement of Cash Flows
- The Income Statement
- 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.