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Entering the Swampy Morass

Footnotes are the fourth essential part of every financial report. The other three are the discussed in the previous chapters and include the Balance Sheet, the Income Statement, and the Statement of Cash Flows.

The chapter starts with a review.

The Balance Sheet : Also called the statement of financial condition. It’s a summary of assets, liabilities, and owner’s equity at the close of business on the last day of the income statement period

Income Statement: Summary of company’s sales revenue and expenses for the period.

Statement of Cash Flows: The statement summarizes cash flow from three group; Operating or profit making activities, investing activities, and financing activities.

Although GAAP (generally accepted accounting principles) do not require it, most businesses present two or three year financial statements. Public companies are required to be audited by an independent CPA.

Footnotes are essential in order to supplement financial statements and provide lenders and investors critical information that is not in the financial statements. Footnotes are considered an integral and inseparable part of financial reports. They provide necessary supplemental and explanatory material in order to meet the overarching principles of financial reporting, adequate disclosure,

Ideally footnotes should be written in clear understandable language with layouts and exhibits that are easy to follow. In reality this rarely happens. Footnotes are often obtuse, intentionally legalistic, and very difficult to follow. This is more prevalent when a company is reporting on sensitive matters, poor business decisions, or ventures that led to heavy losses. Although footnotes are required, there are no rules that state they must be easily understandable.

There are two types of footnotes. One discusses key accounting principles used by the business to determine things like cost of goods sold expense and ending inventory cost. Depreciation and amortization methods are reported in these footnotes.

The second type of footnote provides important information that cannot be placed in the financial statements themselves. This might include notes on pending legal action for or against the company, details of retirement and pension plans, maturity dates and interest rates on long term debt, employee stock options and ownership plans, and dilution effects on earning per share. Managers have a great deal of discretion and leeway about how much to divulge and how candid to be about details. Standards of adequate disclosure in footnotes are not always clear.

Here is an example of an very important footnote from the WFM financial statement:
On November 2, 2011, the Company’s Board of Directors authorized a share repurchase program in the amount of $200 million through November 1, 2013. On November 15, 2012, the Company’s Board of Directors authorized a new share repurchase program whereby the Company may repurchase an amount of outstanding shares of common stock of the Company up to an aggregate amount of $300 million through December 31, 2014.

That’s all I have time for.
Dr. D
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