The financial statements are not the only parts found in a business’s annual and quarterly reports. There are other sections which may contain valuable information for investors and analysts which include:
Management Discussion and Analysis (MD&A):
This provides investors with a clearer picture of what the company does and points out some key areas in which the company has performed well. If a company gives a decent amount of information in the MD&A, it’s likely that management is being upfront and honest. If the MD&A ignores serious problems that the company has been facing, then investors must be cautious with the firm.
The Auditor’s Report:
It is a legal requirement for every public company that trades stocks or bonds on an exchange to have its annual reports audited by a certified public accountants’ firm. An auditor’s report is meant to scrutinise the company and identify anything that might undermine the integrity of the financial statements.
Audits give credibility to the figures reported by management. While quarterly statements are not audited, one should be very wary of any annual financials that have not been audited by an approved accountant.
The Notes to the Financial Statements:
The notes to the financial statements (sometimes called footnotes) tie up any loose ends and complete the overall picture. The footnotes list important information that could not be included in the actual ledgers. For example, they list relevant things like outstanding leases, the maturity dates of outstanding debt and details on compensation plans, such as stock options, etc.
There are two types of footnotes:
Accounting Methods – This type of footnote identifies and explains the major accounting policies of the business that the company feels that you should be aware of. This is especially important if a company has changed accounting policies. It may be that a firm is changing policies only to take advantage of current conditions to hide poor performance.
Disclosure – The second type of footnote provides additional disclosure that simply could not be put in the financial statements. The financial statements in an annual report are supposed to be clean and easy to follow. To maintain this cleanliness, other calculations are left for the footnotes. For example, details of long-term debt – such as maturity dates and the interest rates at which debt was issued – can give you a better idea of how borrowing costs are laid out. Other areas of disclosure include everything from pension plan liabilities for existing employees to details about ominous legal proceedings involving the company.