This week paper requires our team to prepare three notes to the balance sheet and income statement. Also, request us to discuss why footnotes are useful and important to financial statements. Below we have included the requested footnotes (prepared based on our experience working with a CPA Firm in public accounting) and our discussion related in relation to the footnotes:
Inventory is stated at the lower of cost or market using the first-in, first-out method of inventory accounting. Inventory includes certain costs associated with the preparation of inventory for resale, including distribution costs, labor, and freight. The Company records a reserve for the anticipated loss associated with selling inventories below cost. This reserve is based on management’s current knowledge with respect to inventory levels, sales trends and historical experience (Lowe’s).
Property and Equipment and Depreciation Policy:
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged against operations. Renewals and betterment’s that materially extend the life of the assets are capitalized. Depreciation is computed on a straight-line basis over the estimated useful life of the related assets. For income tax purposes, depreciation is computed using the accelerated cost method (AICPA).
The Company periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No evidence of impairment is evident as a result of such review.
The Company establishes deferred income tax assets and liabilities for temporary differences between the tax and financial accounting bases of assets and liabilities. The tax effects of such differences are reflected in the balance sheet at the enacted tax rates expected to be in effect when the differences reverse. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets if it is more likely than not that all or a portion of the asset will not be realized. The tax balances and income tax expense recognized by the Company are based on management’s interpretation of the tax statutes of multiple jurisdictions (Lowe’s).
First of all, it is a fact that footnotes are an integral part of the financial statements (F/S). They contain information that otherwise cannot be included in the body of the F/S, but important enough to influence the judgment of a user or reader (Kieso, Weygrandt & Warfield). Such information could be express either as an explanatory paragraph, schedule or timetables, useful to help users have a better understanding of how the company he intend to invest or extend credit operates, its environment, industry, and how it measure and records transactions. Additional information like going concern issues, contingencies, and subsequent events, which are relevant to reach a conclusion, are included in the footnotes as well. When this happens, it raises red flags to readers, because they provide information and events they may have been occurred after the end of the financial statement’s period, which is necessary for timely accuracy (“Chron”, 2015).
AICPA (2015). Illustrative Financial Statements Prepared Using the Financial Reporting Framework for Small and Medium Entities. Retrieved from: http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/PCFR/DownloadableDocuments/FRF-SME/FRFforSMEs_Illustrative_Financial_Statements.pdf “Chron” Small Business. (2015). Guide-making Footnotes to Financial Statements. Retrieved from: