Part 1, Lesson 13

What are the “Notes to the Financial Statements?”

Every 3 months, a public company will report their quarterly financial statements in a filing known as the “10-Q.”  Every 12 months, a public company will report their yearly financial statements in a filing known as the “10-K.”  For most companies, this entails filing three 10-Qs for the first three quarters of the year and one 10-K for the final quarter of the year along with the full year financials.

In each of the 10-Q and 10-K filings, the reporting company will publish its financial statements, management discussion of earnings, risk factors, and notes to the financial statements.  The notes to the financial statements contain important information that provide additional detail and explanations to the income statement, balance sheet, and cash flow statement.

All US public companies report their 10-Qs and 10-Ks to the US Securities and Exchange Commission, and these filings can be accessed at We will use the SEC website to access a 10-K and review the underlying notes.


The Important Sections within the Notes

Before diving into the notes to the financial statements, let’s discuss where to go to find the financial statements.  The easiest way to look up company filings including financial is to go  At the time of writing, this is what the front page of the SEC website looks like:

We added the red box above to show where you type in the ticker of the company you are searching for.  You can also search by company name or fund name (if looking up filings for an investment fund).  For this example, we will be looking at the filings for Comcast (Ticker – CMCSA).

After hitting enter, we will get to this screen:

The above screen will show a list of all the filings that CMCSA has made with the SEC, which will include its 10-Qs, 10-Ks, 8-Ks, Form 4s, and numerous other filings.  In the red box (which we’ve added), we will type in “10-K” to narrow our search down to just the 10-K filings.

After hitting enter, we will come to the below screen:

The above screen shows all the 10-K filings that CMCSA has submitted to the SEC.  We will click on the most recent 10-K, which was filed on 1/31/2018.  If we scroll down to page 62 of this 10-K, we’ll find the balance sheet, the income statement, and the cash flow statement.

Starting on page 67, we’ll find the beginning of the notes to the financial statements.  CMCSA begins with “Note 1: Business and Basis of Presentation.”

Including this first note, CMCSA lists a total of 18 notes in its 10-K.  Please note that public companies may present its notes in different formats and with different levels of disclosure.

CMCSA has the following notes in its 10-K:

Note 1 Business and Basis of Presentation
Note 2 Accounting Policies
Note 3 Recent Accounting Pronouncements
Note 4 Earnings Per Share
Note 5 Significant Transactions
Note 6 Film and Television Costs
Note 7 Investments
Note 8 Property and Equipment
Note 9 Goodwill and Intangible Assets
Note 10 Long-term Debt
Note 11 Employee Benefit Plans
Note 12 Equity
Note 13 Share Based Compensation
Note 14 Income Taxes
Note 15 Supplemental Financial Information
Note 16 Commitments and Contingencies
Note 17 Financial Data by Business Segment
Note 18 Quarterly Financial Information
Note 19 Condensed Consolidated Financial Information

For new investors, it is helpful to read through each of those notes to get a more detailed understanding of the type of information that is presented.  In practice, many investors do not read the entire notes section, particularly when evaluating hundreds of different companies, but will refer to specific sections that are of particular importance when evaluating the business and its future prospects.

Below, we will list a few of the Notes sections that we believe would be most relevant to review while analyzing CMCSA.  Please note that this represents an opinion of the author and is not meant to be strict guidance of what is important/unimportant or correct/incorrect:

Note 4: Earnings Per Share

This note is helpful to investors in evaluating CMCSA’s calculation of earnings per share (EPS).  It gives the reader a sense of how the diluted share count affects the EPS figure.

Please note the below definitions:

Basic EPS = Net Income / Basic Shares Outstanding

Basic shares outstanding is the total number of shares that have been issued to investors without taking into account how much this share count may be diluted due to shares issued to employees (or as the result of dilution from convertible securities).

Diluted EPS = Net Income / Diluted Shares Outstanding

Diluted shares outstanding is the total number of shares issued to investors while taking into account how many additional shares would be issued to employees as a result of previously issued stock options.  The diluted share count also incorporates any additional shares that would be issued due to dilutive securities such as convertible debt.

The key difference between diluted shares and basic shares is that basic shares gives the exact share count as it stands today.  Whereas, the diluted share count incorporates how the basic share count would increase if all additional shares that are “owed” pursuant to stock options and other dilutive securities are distributed out.

For example, let’s say Company A has 1,000 shares outstanding (basic) and $25,000 of net income.  Its basic EPS would be $25.

Let’s also assume that Company A has issued stock options which give employees the right to receive up to 100 shares of Company A.  If we assumed all 100 shares are immediately exercisable, then, the diluted share count would be 1,100 shares and the diluted EPS would be $22.73.

However, in practice, Company A likely has a vesting schedule to its employees and/or is only providing stock options that may be exercised beyond a certain stock price.  Therefore, when calculating diluted shares outstanding, we must incorporate how many of these 100 shares from stock options are exercisable today.

Let’s assume that Company A issued these stock options 1 year ago and created a 4-year vesting schedule that allows 25% of the 100 shares to vest each year.  In that case, only 25 of these shares are exercisable today, so the diluted share count would instead be 1,025 and the diluted EPS would be $24.39.

This is an over-simplification of the calculation of the diluted share count.  The proper calculation of share dilution should also include option strike prices, the current company stock price, and any convertible securities.

Note 5: Significant Transactions

This section is helpful for investors to understand major transactions that CMCSA has entered into.  This will help to explain large activity in the financial statements, which would not have been clear without this section.

Note 6: Film and Television Costs

For CMCSA investors, this note will be helpful in analyzing film and television costs on a standalone basis.  Given that this expense is a big-ticket item for CMCSA, investors appreciate having the additional detail when forecasting.

This note is of course an item that will not appear in other company 10-Ks as it is specific to CMCSA.

Note 7: Investments

This note is important because it gives investors a sense for CMCSA’s equity investments.  Recall that equity investments are investments in which CMCSA owns a minority stake (less than 50%) of other companies.  Therefore, these results are not consolidated into the financial statements.

Moreover, if these investments are in companies that are not paying dividends, then, CMCSA is likely not receiving any dividends or distributions from these investments, so the diluted EPS does not show any benefit from these investments.

This section shows that CMCSA has invested $6.9 billion in other companies.  When putting a value on CMCSA equity, should we incorporate these equity investments in our view of the value of CMCSA?  If we simply valued CMCSA equity based on a multiple of EPS, we would end up missing the value of these investments.

We would argue that the valuation of CMCSA should include some benefit for these investments based on their current market value.

Note 8: Property and Equipment

This section provides detail on what type of property and equipment CMCSA has invested in and provides specifics on its depreciation method.

Note 10: Long-term Debt

The debt schedule note is a very important section, which is frequently reviewed by investors.  This section will provide a detailed debt schedule showing all the outstanding debt obligations of CMCSA, upcoming maturity dates, and interest rates.

For large companies like CMCSA with multiple debt issues, it is important for investors to pay attention to when CMCSA must paydown or refinance upcoming debt as they become due.  Based on the prevailing interest rate environment, investors may also get a sense for whether CMCSA has an opportunity to lower its interest expense by refinancing high cost debt or if CMCSA may run into higher interest expense in future years if interest rates are in an increasing environment.

Note 11 – Employee Benefit Plans

For companies with large pension obligations, this note will be particularly useful in identifying the size of any potential unfunded liabilities.  Since pension obligations are typically off-balance sheet items, many investors will add the total amount of unfunded pension liability to the outstanding debt of the company.

CMCSA does appear to have unfunded pension obligations, but these obligations do not appear to be particularly large given the size of the company.

Note 14 – Income Taxes

Most companies will include an income tax note, and within this note, will provide a reconciliation of the tax expense at the federal statutory rate vs. what is recognized in the income statement.  This note often includes information on net operating loss carryforwards, which can help investors to determine if a company will be paying cash taxes that are less than their recognized tax expense in the income statement.

Note 17 – Financial Data by Business Segment

For large companies with multiple lines of business, the financial information by business segment is very helpful in performing a deeper dive into the business.  This can help investors to identify the more profitable vs. less profitable business segments within the overall company, which can often affect how an investor thinks about valuation.

For example, if you had a single company that was involved in two very different lines of business, investors may value one business segment at a certain valuation multiple and the other business segment at a different valuation multiple.

For CMCSA, this is particularly relevant since CMCSA acquired NBC Universal, leading to a dynamic where CMCSA is engaged in two different businesses – 1) the cable segment focused on content distribution and 2) the NBCU segment focused on content creation.

Investors have historically assigned different valuation multiples to cable businesses vs. media businesses (NBC), so having financial data by business segment allows investors to assign a more precise valuation to CMCSA.  Refer to Part 2, Lesson 12 for more detail on sum of the parts valuation.