In the process of finalization of accounts of a firm, financial statements (income statement, balance sheet, statement of retained earnings, and cash flow statements) are prepared. Each of these statements shows some figure which may require further clarification for understanding. Such clarifications in systematic manner are explanatory notes.
These are required for protecting stakeholders’ interest. Stakeholders are investors, suppliers, bankers, etc. They may require detail information about earnings, assets, and/or net worth for their future decisions. Financial statements can’t give such detailing; therefore, explanatory notes are required.
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