Free «Importance of Notes to Financial Statements» Essay Sample

Importance of Notes to Financial Statements

Financial statements form an important section of any organizations. They are the most important parts in organizational performance. Therefore notes to these essential documents will provide a full description and guidance on the accounting processes, adopted policies and the working methods used by a particular organization.  They also elaborate on and distinguish items and information presented in the balance sheet and other financial statements prepared by a particular organization, (Stickney, C. P., 2010).Information carried by notes is:

  • Accounting methods, policies and strategies
  • Presentations and definitions availed in financial statements
  • Items listed in the financial statements
  • Summary of financial situation and reporting

As an investor, it is advisable to evaluate and understand the financial position and future of an organization before investing.  Through notes to the financial statements, an investor will manage to understand an organization statement of financial position, evaluate the income statement and statements of cash flows and most importantly changes in the shareholders equity, (Libby, 2009). These three statements are necessary in making a wise investment decision.

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Does paying an executive $1 per year but giving them stock options create an agency issue? Why or why not?

A number of corporations are paying their chief executives through stock and this has raised a heated debate. Company boards are really making a wise decision which has seen many gradually increase their income. Paying executives $1 per year but giving those stocks options does not bring an agency issue but rather consolidates and motivates the performance of the executive, (Madura, J., 2012). By giving those stocks options, they will perform better knowing they will be working for their company.

Distinguish between each of the following pairs. What exactly makes them different? Why

Spot market and futures market

A spot market is an open market where contracts are bought and sold with cash and the goods are expected to be delivered immediate; the contact is immediate. The period of delivery is expected to be immediate.

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A futures market is a market where a transaction is expected to be delivered in less than a month. The transaction may be spot but the transaction will be expected in the future of not more than a month.

Option contract and futures contract.

Options contracts give the buyer or seller the right to choose and buy a specific good or service while a future contract gives the right to buy or sell a good right now and then it will be delivered in a future date according to the lengthy of the contract, (Goodman, J. E. ,2003).

Primary market and secondary market.

A primary market is the original securities issue market; where the initial offers in the market. The secondary markets are the common known stock markets where the initial offers go, (Madura, J., 2012).

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Can ethics be legislated? What about SOX? If it follows all applicable rules and regulations is a company ethical?

Ethics are the foundations of every organization hence they are very essential in building a company. Organizational ethics cannot be legislated because of diversity and free markets.  SOX was legislated in 2002 by congress to protect investors and creditors from unethical and fraudulent practices, (Quigley, M., 2008).

Following company rules and regulations does not mean a company is totally ethical. Some of the rules and regulations catch a smaller ethical platform hence a company should look in enhancing its ethical practices outside the required ethics. Therefore just following the expected rules and regulations does not necessary mean a company is ethical, (Keeble, R., 2008).

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