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What Is Accounting Disclosure?

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  • Written By: Joshua Nuttall
  • Edited By: C. Wilborn
  • Last Modified Date: 08 July 2014
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The purpose of accounting disclosure is to inform both current and potential investors of the accounting strategies and methods used when developing periodic corporate financial statements. These financial statements include, but are not limited to, the balance sheet, the statement of cash flows, the income statement, and the statement of stockholders’ equity. The full disclosure principle requires that any event that would have an impact on the financial statements should be revealed.

As has been seen quite often in the past, the importance of disclosing complete and accurate accounting information can have huge and lasting effects on the individuals, families, competitors, creditors, investors, markets, and many other groups associated with large corporate firms. These groups are known in the accounting world as stakeholders in the company. Financial statements are used by both internal and external users. Internal users use them to plan for the future.

The answers to many important questions are gleaned from the financial statements. For example, a statement may answer whether or not the company can afford to give its employees raises, and whether there is enough cash on hand to expand current projects. It may also reveal which products are the most profitable, and which are the least. The statement might also answer the question of whether a division needs to be shut down to keep the company afloat.

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Accounting disclosure can take many forms. In the United States, this disclosure is most often found in the notes to financial statements, and many can be found in the notes section of the corporate annual report.

Each publicly held company in the US is required by the Securities and Exchange Commission (SEC) to file an annual report with the federal government. Many other countries have similar requirements. This and many other government filings are available to the public in the US after they are submitted to the SEC.

Some companies really make their annual reports look nice, having them professionally designed and published. Other companies rely simply on their official government filing to send to current and potential investors. Many times, companies will make their reports available for download on their corporate websites, usually on their investor relations or related page. It may also be possible to order a hard copy of the annual report and have it shipped by mail.

When reading through the financial section of the annual report, an investor may want to keep a finger in the notes section to better understand the accounting disclosure statements while working through the numbers, tables, and graphs that may be presented. Disclosure statements will clarify the methods and means that were used by corporate accountants to come to the figures presented. They are often too lengthy to include in the financial statement that it is associated with. Also, an investor should look for the auditor’s report in countries where this report is required when reading through the annual report. If an unqualified opinion is expressed, the company presented its financial statements in a fair and understandable manner.

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Discuss this Article

sunshined
Post 2

@golf07 - I understand how you feel. It can be a little overwhelming. I don't read every word, but try to focus on the areas that I understand - such as their cash flow and income statement.

Once I have looked it over and feel comfortable with what I have read, I always keep it on file in case I need it for future reference. When I receive the new report for the current year, I throw the outdated one away.

golf07
Post 1

I know it is important to read the financial statements and annual reports of companies you have invested in, or plan to invest in, but do most people really read through all of them?

The reports often look so intimidating and I feel like you would need to go to accounting school to really understand them.

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