Why Footnotes

A typical annual report contains more than the basic three financial statements. This chapter focuses on one additional piece of information in annual financial reports—footnotes to financial statements. Footnotes provide the so-called fine print. Without footnotes financial statements would be incomplete, and possibly misleading. Footnotes are an essential supplement to financial statements.

Top-level managers should never forget that they are responsible for the company's financial statements and the accompanying footnotes. The footnotes are an integral, inseparable part of the financial statements. In fact, financial statements state this fact on the bottom of each page, usually worded as follows:

The accompanying footnotes to the financial statements are an integral part of these statements.

The auditor's report (see the next chapter) covers footnotes as well as the financial statements. In short, footnotes are necessary for adequate disclosure in financial reports. The overarching concept of financial reporting is adequate disclosure, so that all those who have a legitimate interest in the financial affairs of the business are provided the relevant information they need to make informed decisions and to protect their interests in the business.

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