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Footnote disclosures describe how the numbers in the statement of financial position, statement of activities and cash flow statements were determined and provide a sense of where the organization is going. Financial statements are required to provide full disclosure, including future contingencies and commitments.

The main purpose of the notes to the financial statements is to further clarify accounting procedures used by a company, as well as to divulge information that has occurred during and immediately after the close of the accounting period.

Pick up any financial report and you'll always find references to the footnotes of the financial statements. The footnotes describe in detail the practices and reporting policies of the company's accounting methods and disclose additional information that can't be shown in the statements themselves.

Companies have two inventory issues that must be disclosed in the notes: the basis upon which the company states inventory (lower of cost or market) and the method in use to determine cost. GAAP allows three different cost flow assumptions: specific identification; weighted average; and first in, first out (FIFO).

Notes to the financial statements disclose the detailed assumptions made by accountants when preparing a company's: income statement, balance sheet, statement of changes of financial position or statement of retained earnings. The notes are essential to fully understanding these documents.

The notes to the financial statements communicate information necessary for a fair presentation of financial position and results of operations that is not readily apparent from, or not included in, the financial statements themselves.

When companies file their annual financial statements, they often add footnotes beneath the statement. Footnotes to the financial statements refer to extra information that a company supplies about its finances when filing a financial statement.