One piece of advice we hear often is that it's always good to read the fine print. A company's financial statements shouldn't be any different. The footnotes are the fine print that explains the details of the 澳洲幸运5官方开奖结果体彩网:income statement, 澳洲幸运5官方开奖结果体彩网:balance sheet, and 澳洲幸运5官方开奖结果体彩网:statement of cash flow that provide a company's financial information.

What Are Footnotes?

Pick up any 澳洲幸运5官方开奖结果体彩网:financial report and you'll find references to the footnotes of the financial statements. They describe in detail the practices and reporting policies of the company's accountin☂g methods and they discloꩵse additional information that can't be shown in the statements themselves.

Footnote information can generally be split into two areas. The first deals with the accounting methods a company chooses to formulate its financial information such as 澳洲幸运5官方开奖结果体彩网:revenue recognition policies🌱. The second provides an expanded explanation of important company operational and financial results.

Accounting Methods

This area tends to be at the beginning of the footnotes. It identifies and explains a company's major accounting policies. These footnotes are broken into specific accounting areas such as revenue and 澳洲幸运5官方开奖结果体彩网:inventory that detail a company's policy about that account and how its val🍌ue is determined.

One of the most important financial measures of a company is revenue. You'll often find a 澳洲幸运5官方开奖结果体彩网:revenue recognition note in the footnotes that de🐈scribes how a company determines when it's earned its revenue. The point at which a sale can be booked and placed on the financial statements isn't always clear-cut due to the often compl♏ex nature of business operations. Ford Motor Co. recognizes a sale when a dealership takes possession of a Ford vehicle.

This secꦦtion will give an investor valuable insight into ꧟when a company books revenue.

What to Look For

Focus on two things when analyzing a company's accounting methods found in the footnotes.

The Accounting Method

The first is a company's accounting method and how it compares to the Generally Accepted Accounting Principles (GAAP) and industry standards. It could be a sign that the company may be trying to manipulate its financial statements to cover up an undesirable event or give the perception of better performance if it's using a policy that differs from others in the industry or one that seems far too aggressive.

Let's assume that Company X books the revenue when a car is produced rather than booking revenue upon ownership transfer. This strategy is far too aggressive because Company X can't ensure that dealerships will ever take possession of that car.

Another example would be a magazine company that books all its sales at the start of subscriptions. The company hasn't performed its side of the sale by delivering the product and should only book revenue when each magazine is sent to the subscriber.

Changes Made in an Account

Any changes made in an account from one period to the next are the second it꧙em of importanc♕e to examine. This can affect the bottom-line financial statements.

Imagine Company X switched from the delivery method to the production method. Booking revenue before goods are transferred would increase the aggressiveness of Company X's accounting. The company's financial statements would become less reliable because investors wouldn't be sure how much revenue was derived from actual sales and how much of the represented product was produced but not delivered by Company X.

It's important to first gain a basic understanding of the 澳洲幸运5官方开奖结果体彩网:Generally Accepted Accounting 🌳Principles standards of computing financial information. This will all♋ow you to identify when a company isn't following this staജndard.

Disclosure and Financial Details

The financial statements in an annual report are supposed to be clean and easy to follow. Otheܫr calculations are placed in 𒆙the footnotes to maintain this cleanliness.

The disclosure segment gives details about 澳洲幸运5官方开奖结果体彩网:long-term debt such as maturity dates and interest rates that can give you a better idea of how borrowing costs are laid out. It also covers details regarding 澳洲幸运5官方开奖结果体彩网:employee stock ownership and 澳洲幸运5官方开奖结果体彩网:stock options issued which are also important to investors.

Other details mentioned in the footnotes include errors in previous accounting statements, looming legal cases in which the company is involved, and details of any synthetic leases. These types of disclosures are of the utmost importance to investors with an interest in the company's operations.

Another important focus found in the disclosure segment is what's left off of the financial statements. The rules of a company's 澳洲幸运5官方开奖结果体彩网:accounting standards may allow it to keep a large liability off the financial statements and report it in the footnotes instead. Investors will miss these liab🔯iliti♔es or risks that the company faces if they skip the footnotes.

Problems With Footnotes

Footnotes are a required part of any financial statement but there are no standards for clarity or c💯onciseness.

Management is required to disclose information "beyond the legal minimum" to avoid the risk of being sued. Where this minimum lies is based on management's subjective judgment, however. Footnotes must be as transparent as possible without harmfully releasing 澳洲幸运5官方开奖结果体彩网:trade secrets and other pertinent information about things that give the company its competitive ed🤪ge.

Another 𒀰problem is that companies will sometimes attempt to confuse investors by filling the footnotes with legal jargon and technical accounting terms. Be suspicious if a description is difficult to decipher. The company ♔may have something to hide. It may be wise to simply move on to another company if you see a situation in which one is writing only a paragraph on a major event or using convoluted language to skirt it entirely.

The Bottom Line

Footnotes are a required part of any financial statement but there are no specific standards that must be followed about how they're set forth. Ask questions if you're unsure about what you're seeing there.

Informed investors dig deep looking for information that others typically wouldn't seek. Read the fine print no matter how boring it might seem at first glance. You'll be glad you did in the long run.