Schedules and Notes to the Accounts
The schedules and notes to the accounts are an integral part of the financial statements of a company and it is important that they be read along with the financial statements.Schedules - The schedules detail pertinent information about the items of Balance Sheet and Profit & Loss Account. It also details information about sales, manufacturing costs, administration costs, interest, and other income and expenses. This information is vital for the analysis of financial statements.
The schedules enable an investor to determine which expenses increased and seek the reasons for this. Similarly, investors would be able to find out the reasons for the increase or decrease in sales and the products that are sales leaders. The schedules even give details of stocks and sales, particulars of capacity and productions, and much other useful information.
Notes - The notes to the accounts are even more important than the schedules because it is here that very important information relating to the company is stated. Notes can effectively be divided into:
Accounting policies - All companies follow certain accounting principles and these may differ from those of other entities. As a consequence, the profit earned might differ. Companies have also been known to change (normally increase) their profit by changing the accounting policies. For instance, ABC Co. Ltd.’s Annual Report stated among other things, “There has been a change in the method of accounting relating to interest on borrowings used for capital expenditure. While such interest was fully written off in the previous years, interest charges incurred during the year have been capitalized for the period upto the date from which the assets have been put to use. Accordingly, expenditure transferred to capital account includes an amount of Rs. 46.63 crores towards interest capitalized. The profit before taxes for the year after the consequential adjustments of depreciation of Rs. 0.12 crore is therefore higher by Rs. 46.51 crores than what it would have been had the previous basis been followed”. This means that by changing an accounting policy ABC Co. Ltd. was able to increase its income by Rs. 46 crore. There could be similar notes on other items in the financial statements.
The accounting policies normally detailed in the notes relate to: o How sales are accounted for?
o What the research and development costs are?
o How the gratuity liability is expensed?
o How fixed assets are valued?
o How depreciation is calculated?
o How stock, including finished goods, work in progress, raw materials and
consumable goods are valued?
o How investments are stated in the balance sheet?
o How has the foreign exchange translated?
Contingent liabilities - As noted earlier, contingent liabilities that might crystallize upon the happening of an uncertain event. All contingent liabilities are detailed in the notes to the accounts and it would be wise to read these as they give valuable insights. The more common contingent liabilities that one comes across in the financial statements of companies are:
o Outstanding guarantees.
o Outstanding letters of credit.
o Outstanding bills discounted.
o Claims against the company not acknowledged as debts. o Claim for taxes.
o Cheques discounted.
o Uncalled liability on partly paid shares and debentures.
Others - It must be appreciated that the purpose of notes to the accounts is to inform the reader more fully. Consequently, they detail all pertinent factors which affect, or will affect, the company and its results. Often as a consequence, adjustments may need to be made to the accounts to unearth the true results. The more common notes one comes across are:
o Whether provisions for known or likely losses have been made. o Estimated value of contracts outstanding.
o Interest not provided for.
o Arrangements agreed by the company with third parties.
o Agreement with labour.
The importance of these notes cannot be overstressed. It is imperative that investors read
these carefully.
Subscribe for free for your best resource for share tips India here.
You
should Trade Less But Trade Accurately & this is Achieved with our Tip.
