Thorough analysis of financial statements should include a review of the auditor’s report, where the auditor expresses an opinion as to whether the financial information being presented conforms to generally accepted accounting principles. Any significant deviation from such principles will be noted.
Another source of information are the notes to the financial statements, which outline the various accounting methods used in those statements. Also contained in the financial statement notes is information as to contingent liabilities facing the company. These are the liabilities that the company may suffer under certain circumstances. The notes should contain information about such contingencies, including the probability of loss to the company involved. Contingencies that are probable in nature and can be reasonably estimated must be shown on the balance sheet as a liability. Other descriptive notes may include information on pension plans, income taxes and long term debts.