The notes are the pages after the three statements that explain how the numbers were made. Which method for inventory. How revenue is counted. What the debt costs. What the segments are. Every number on the statements has a note behind it.
The notes are the pages after the three statements that explain how the numbers were made. Which method for inventory. How revenue is counted. What the debt costs. What the segments are. Every number on the statements has a note behind it.
The auditor's opinion is a letter from the outside accounting firm at the start of Item 8. It says whether the statements fairly present the company's position. An unqualified opinion is a clean one. Anything else is news.
Critical audit matters are the parts of the audit the auditor found hardest. They've been required in the letter since 2019. They tell you where the judgment calls are.
Apple's 10-K for the year ended September 30 2023. Item 8 opens with the report of Ernst and Young. It's an unqualified opinion. Then it names the critical audit matters. For Apple one of them is uncertain tax positions. That tells you where Apple's accountants and its auditors spent their arguments.
Then the notes. The revenue note explains that Apple defers part of an iPhone sale to cover free software updates. That's day 8 in Apple's own words. The segment note splits sales by geography. Americas. Europe. Greater China. Japan. Rest of Asia Pacific. The debt note lists every bond and its rate. The income tax note is where that critical audit matter lives.
Four notes. Fifteen minutes. You'd know more about Apple than most people who own the stock.
The trap is skipping the notes because the statements looked fine.
The statements are the summary. The notes are where a company tells you the things it has to tell you and would rather not. Which subsidiary is losing money. What the pension owes. Which customer is a fifth of revenue. Lawsuits. Guarantees.
The other trap is a restatement. When a company reissues past statements because they were wrong it says so in the notes and in the auditor's letter. A restatement is the single loudest signal in accounting. Read it before anything else.
You're about to present a company to your investment club. You've read the three statements. Your co-presenter says that's enough.
Name the first thing to read in Item 8.
The auditor's opinion. Confirm it's unqualified.
Name what the critical audit matters tell you.
Where the judgment calls are. The numbers most likely to be argued.
Which two notes matter most for a company that sells subscriptions?
The revenue note for how sales are counted. The segment note for where they come from.
Reply to your co-presenter in one sentence.
The statements are the summary and the notes are where the company tells you what it has to. We read four of them before we present.
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