Why are footnotes so important?? Someone told me that they're just as important as the statements themselves?? An explanation and an example would be really help me understand this..
I'm just a sophomore in college, so I apologize if this sounds obvious.
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Highly suggest you join Mr. Pink Money's group: Read the Footnotes and check out some of his old posts...
http://www.wallstreetoasis.com/group/read-the-footnotes
Headline - 'Company X has outperformed the sector over the last 12 months'
Graph showing share price of Company X exceeding another line marked 'Sector Average' over 12 months
Footnote - 'Sector is comprised of Company Y, Company Z and Company A' - this can be easily manipulated to show simply the 3 worst companies in the sector.
From a very high level, general statements can hide a lot of shit about a company. In order to even start getting into how a company operates, what it owns, what its obligations are, etc. you need to read the footnotes. Examples: off-balance sheet financing, pension liabilities, future lease commitments, etc.
While Financial Statements are more or less uniform and standardized, the problem is that companies are not. Therefore, while some accounts may be nominally the same thing between two different companies, in reality, the two accounts may actually be drastically different, so you have to read the footnotes.
To take a typical example, let's assume there are two companies that are for all intents and purposes identical, except that one uses LIFO and the other uses FIFO. Depending on the direction that input costs are moving, the two companies could realize very different COGS, even though the two are operationally identical. You wouldn't realize that unless you read the notes.
look at a pitchbook (do a quick google search) and it'll be obvious. long story short, if you included all the specifics in the body of the page rather than using the footnotes, the page would look cluttered.
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