Insider: Disclosure Statements Beyond financial statements, how do you believe creditors and investors are able to better

analyze and determine the health of a company's financial position, operations, and cash flows? From hear-say? No. Along with the financial statements of a company, disclosure notes are included in their annual report. This significant portion of an annual report explains into further detail the data listed in such documents as a balance sheet, income statement, statement of retained earnings, etc. Sometimes disclosure notes discuss specific items which aren't directly related to information within financial documents. A few significant notes, which are required to be included in an annual report, include the summary of significant accounting policies, subsequent events, noteworthy events and transactions, along with, management's discussion and analysis, responsibility disclosure of management, and an auditor's report. Disclosure notes of a company can be fewer or greater than that of other companies depending on the needs of a particular company. Nevertheless the amount of disclosure, any information that adds to investors' and creditors' ability to understand and analyze a company's financial and operational health is needed (Spiceland David, 2013, pp. 124-130). To begin, the summary of significant accounting policies is an important disclosure note for it explains to creditors and investors information regarding the accounting method chosen by a company. Examples of information presented would relate to how a company calculates depreciation and whether it uses FIFO, LIFO, or average cost to assess inventories. Other information given specifies which securities a company acknowledges to be cash equivalents or investments and its approaches toward recognizing revenue (Spiceland David, 2013, p. 125). The summary of significant accounting policies of Wal-Mart Stores, Inc. for fiscal year 2011 discusses, among other things, how the company determines what assets are

classified as cash and cash equivalents and its use of estimates. Wal-Mart classifies assets with a maturity of 90 days or less as being cash equivalents. Forms of cash and cash equivalents of the company include transactions involving credit cards and debit cards of their customers, not to mention, restricted cash with regards to cash collateral holdings. The company's mention of its use of estimates discusses how management is required to use estimates that impact its assets and liabilities, but which may vary from actual data. Wal-Mart's summary of significant accounting policies also mentions information concerning receivables, inventories, capitalized interest, revenue recognition, etc. The company considers accounts receivable as being mostly from such entities and exchanges with transactions related to its pharmacy sales, marketing program suppliers, and consumer financing programs. The last-in first-out method of valuing inventory is also used by Wal-Mart. Moreover, it capitalizes on interest expenses related to construction assignments which are added as part of the total for each project's costs. As for revenue recognition, the company recognizes revenue from sales at the point in time when merchandise is sold to each customer. So forth, one can understand that the summary of significant accounting policies is vitally important due to the fact that external users need to know how companies go about such actions as allocating cost, determining depreciation, recognizing revenue, and defining certain accounts like receivables (Wal-Mart 2011 Annual Report, 2011, pp. 34-35). Next, the disclosure notes for subsequent events and noteworthy events and transactions relate to events which have a substantial effect on a company and those that occur on occasion, respectively. Specifically in the case of the note for subsequent events, it is used to explain for any events which have a material impact on a company's financial health and come about inbetween the end of a fiscal year and the date at which financial documents are issued or are

available to be. Instances of subsequent events may include dividends being declared or even environmental occurrences that impact a company's operations as in the case of Wal-Mart in2011. An annual dividend increase was approved by the company's board of directors for the next fiscal year from being $1.21 per share to $1.46 per share. Wal-Mart also reported the occurrence of an earthquake in Japan on March 11, 2011. The earthquake had a magnitude of 9.0 and created much destruction over Northeastern Japan causing a power outage, deficiency in water, and transportation being down. Furthermore, disclosure notes containing noteworthy events and transactions may involve related-party transactions, errors and irregularities, and illegal events. Related-party transactions occur the most often between them all. To explain this type of transaction in detail, on occasion, companies will participate in transactions with relatedparties such as shareholders, management, associated companies, etc., that can have a major influence on a company or vice versa. The problem with this type of transaction deals with the potential for misrepresentation due to the relationship between the parties causing a possible conflict of interest. This can lead to the parties involved being benefitted in some way whereas shareholders of the company are not. As to errors and irregularities, errors are unintended, though; irregularities are deliberate falsifications of financial documents. These sorts of situations are required to be recorded or else, fines will be given to companies if nothing else. Another noteworthy event would be illegal acts as in bribes and payoffs to encourage illegal activity. Like errors and irregularities, it is mandatory for them to be reported (Spiceland David, 2013, pp. 125-128). Thus far, one can see that there is more to tell from a business beyond its financial documents. Besides the disclosure notes mentioned previously, management must add its discussion and analysis of important current events and incertitude of happenings, along with a section

about its responsibilities to the company and an auditor's report. The discussion and analysis section for Wal-Mart at fiscal year-end 2011 included a component concerning company performance metrics. This area of the note dealt with explaining three ways to increasing shareholder wealth, which are growth, leverage and returns. Additionally, this particular note presented charts with figures for each way of increasing shareholder wealth. Overall, the note presented more explanation with data of the health of the company with information about liquidity, cash flow, and return on investment, etc. (Wal-Mart 2011 Annual Report, 2011, pp. 16-23). Wal-Mart, along with every other company, must provide a disclosure note discussing management's responsibilities toward the company and for its financial statements. The key point to remember of this note is that management of a company lists its responsibilities, performance of internal control over financial reporting, and assures users that the financial documents prepared are in uniform with United States Generally Accepted Accounting Principles. The last note which should be included in an annual report of a company is an auditor's report. This report confirms or disconfirms whether or not a company has presented accurate data in its financial documents (Spiceland David, 2013, pp. 129-130). Ernst & Young LLP is the professional service organization which audits Wal-Mart and at year-end 2011, the company's financial documents were expressed as being presented satisfactorily. The audit, as with all others by Ernst & Young LLP, was in accordance with the guidelines of the Public Company Accounting Oversight Board. Wal-Mart's internal controls were also audited and approved in accord with the PCAOB (Wal-Mart 2011 Annual Report, 2011, p. 55). In short, not only must a management team provide additional information about the financial health and operations of a company, but it must also discuss any current events happening, share insight

into its responsibilities and related internal control operations. Disclosure notes involving management and independent auditors are essential to the credibility of a company. In conclusion, disclosure notes are helpful and important add-ins to the annual report of a company. Their purpose is to explain in further detail the financial health and operations of a company, discuss indirectly related events within financial documents, list the responsibilities of the management team, and to provide an auditor's report as well. There are numerous disclosure notes beyond what have been listed previously. Those are simply the most important. It simply depends on what needs to be reported as to how many additional notes there will be. For instance, if several subsequent events occur in-between a fiscal year-end and the issuance of a company's financial documents, then there will be much more reporting. The same situation goes for related-party transactions and if there are any occasions of errors, irregularities, and illegal acts happening. Hopefully with every company in a perfect world, there would be little to none of these types of events and there would be a clean auditor's report. Sadly, this is not the case for every company in this world. Until that day, disclosure notes will hold major importance for companies having to list for any intentional falsifications financial documents

Works Cited Spiceland David, J. e. (2013). Intermediate Accounting. New York, NY: McGraw-Hill/Irwin Wal-Mart 2011 Annual Report. (2011). Retrieved from Wal-Mart Stores: http://www.walmartstores.com/sites/annualreport/2011/financials/Walmart_2011_Annual _Report.pdf