The preparation of financial statements in accordance with generally accepted accounting principles requires the use of certain estimates and assumptions. These may include an estimate for the allowance for doubtful accounts, accrued expenses, and the valuation of certain accounts, such as marketable securities and inventories. This is normal accounting practice, and if any major difference were to arise between previously estimated amounts and actual results, this should be the subject of a separate note with full disclosure of the effects.
Cash Equivalents
This is generally an explanation of what constitutes cash equivalents for purposes of the cash flow statement. The note may indicate which types of financial instruments are included in its definition of cash equivalents, or may include a phrase such as, “For purposes of the statements of cash flows, the company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents”.
Allowance for Doubtful Accounts
The method the company uses to account for the risk of uncollectible accounts receivable from customers is indicated here. This may be an expression that this allowance is based on historical experience, is expressed as a percentage of gross sales, or that some other method is used. An analysis of the allowance account may be presented, such as:
Allowance for doubtful accounts at beginning of year
Additions charged to bad debt expense
Write-downs charged against the allowance
Recoveries of amounts previously charged-off
Allowance for doubtful accounts at end of year
Notes Receivable
Any allowance for impaired notes (notes that may not be collected in full) should be noted here. The method of measuring the amount of the impairment may be noted, such as the present value of expected future cash flows discounted at the note’s effective interest rate.