Notes to the financial statements are an integral part of an entity's financial reporting. They accompany the financial statements such as the balance sheet, income statement, and cash flow statement and provide supplementary details and disclosures that offer a fuller understanding of an entity's financial condition and performance. These notes typically include a summary of significant accounting policies, explanations of individual line items, information on contingent liabilities and commitments, and any other material information that is relevant for stakeholders.
For instance, the notes might elaborate on how the valuation of inventory was conducted (e.g., using FIFO or LIFO). Another common disclosure is the explanation of the calculation of deferred tax liabilities or assets.
The notes are crucial for users of financial statements, such as investors, analysts, and auditors because they provide context and transparency that supports the numbers presented in the statements. Without the notes, it would be challenging to fully understand certain assumptions or methods used in preparing the financial reports.