The notes to the accounts are a series of notes that are referred to in the main body of the financial statements.
The notes give further details on the numbers given in the accounts. The importance of these numbers should not be underestimated. The accounts are not complete without the notes. Investors who rely on the main body of the accounts and ignore the notes are likely to find themselves misled.
Typical notes include:
- a reconciliation of operating profit to operating cash flow which can be used to calculate EBITDA, and working capital movements,
- a geographic breakdown of sales which can give investors an idea of exposure to different national economies,
- details of assets and liabilities.
Because the notes can greatly change one's interpretation of the numbers in the financial statements, a very effective way of understanding a set of financial statements is to read the notes first — to read the accounts from the bottom up.